Sri Lanka’s desperately-needed financial lifeline from the International Monetary Fund may be in jeopardy due to an insufficient debt restructuring offer from China, Colombo’s largest bilateral creditor.
The IMF is requiring that Sri Lanka first receive assurances from its largest bilateral creditors, namely China, India and Japan, to restructure its outstanding debt. While India and Japan both did so unconditionally, China last week came forward with a somewhat reduced offer that sources tell Sri Lanka’s Daily Mirror newspaper will not be enough to satisfy the IMF.
Earlier in January, the China Exim Bank sent a letter to the Sri Lankan Finance Ministry with an offer to restructure its outstanding loans. It’s important to note that China Exim is only one of several Chinese creditors who together account for approximately 20% of the South Asian country’s external debt, however, the other Chinese creditors have either not come forward or their offers remain undisclosed.
That said, based on what’s currently known about the China Exim offer, here are the two main reasons why insiders are concerned it will not meet the IMF’s requirements needed to clear the way for a $2.9 billion emergency finance package:
- DEBT HOLIDAY TOO SHORT: Paris Club creditors have called for a 10-year debt repayment moratorium with another 15 years of debt restructuring, which is much longer than the China Exim Bank’s two-year debt service deferral for Sri Lanka.
- WHAT ABOUT THE REST? China Exim Bank owns $2.83 billion of Sri Lanka’s debt, about half of the total. The IMF may want other Chinese creditors to come forward with their debt restructuring offers.
WHY IS THIS IMPORTANT? The debt restructuring process in Sri Lanka is widely regarded as a critical test for China and how it may handle debt relief in other economically distressed developing countries. What makes SL unique, though, is that it’s also at the center of an increasingly contentious geopolitical struggle among China, Japan, India, and the U.S.
SUGGESTED READING:
- Daily Mirror (Sri Lanka): China’s offer not sufficient for IMF deal
- Reuters: China offers Sri Lanka debt moratorium, IMF help still in doubt by Devjyot Ghoshal and Uditha Jayasinghe
