Sri Lanka’s Debt Restructuring Deal with China: Impacts and Considerations

Sri Lanka has announced that it has reached a debt restructuring agreement with China, which involves $4.2 billion of debt. This development is significant for Sri Lanka’s ongoing efforts to revive its economy, as it aims to unlock the next tranche of a bailout program. The country defaulted on its foreign debt in May 2022, triggering a severe financial crisis accompanied by nationwide protests due to skyrocketing prices and shortages of essential goods.
The support provided by China’s Export and Import Bank (EXIM) in resolving Sri Lanka’s debt situation is acknowledged by the Finance Ministry of Sri Lanka. However, specific terms of the agreement have not been disclosed yet. It is worth noting that China is Sri Lanka’s largest creditor, accounting for 52% of its total foreign debt of $46.9 billion.
Reaching agreements with all creditors, including China, is crucial for Sri Lanka to continue accessing funds from its $3 billion bailout program with the International Monetary Fund (IMF). Unfortunately, the disbursement of the next tranche worth $330 million has been on hold since last month, as Sri Lanka and the IMF have not been able to reach a consensus on the terms.
A potential concern among other creditors is that China may have negotiated special terms for restructuring its loans, potentially burdening the remaining creditors. Dhananath Fernando, from the Colombo-based think tank Advocata, suggests that the undisclosed details of the EXIM deal might fuel such concerns. Japan, India, and France have expressed their desire to be treated equally and have requested the same terms as China in the debt restructuring discussions. It is worth mentioning that China has a history of securing deals in secret and keeping the details private.
Sri Lanka has assured that all creditors will be treated equally and has even requested lenders to reduce outstanding debt by 30%. The country earlier received a $3 billion loan from the IMF and a $600 million loan from the World Bank in 2022.
Amidst this situation, speculation arises whether Sri Lanka’s economic crisis is finally coming to an end. The successful debt restructuring deal with China is undoubtedly a positive step towards recovery. However, reaching agreements with other creditors remains vital for the country’s economic stability.
The international community had high hopes for Sri Lanka to secure deals with various creditors at the recent IMF and World Bank annual meetings in Marrakech. Unfortunately, reports suggest that negotiations have been challenging and a consensus has not yet been reached.
In conclusion, Sri Lanka’s debt restructuring agreement with China has significant implications for the country’s economic recovery. The ability to unlock the next tranche of the IMF bailout program is crucial for Sri Lanka to address its financial crisis. However, concerns regarding special treatment for China and the need for equal treatment among all creditors may hinder progress in debt restructuring discussions. Transparency and fair negotiations will be key to resolving the debt situation and ensuring long-term financial stability for Sri Lanka.