- China offers debt service relief in 2022, 2023
- Sri Lankan sources unclear if China’s letter will be enough for IMF
- A broad agreement between the IMF and China on Zambia could provide clues
NEW DELHI/COLOMBO, Jan 24 (Portal) – The Export-Import Bank of China has offered Sri Lanka a two-year moratorium on its debt, saying it would support the country’s efforts to obtain a 2.9-dollar loan billions of dollars from the International Monetary Fund. according to a letter verified by Portal.
Regional rivals China and India are the largest bilateral lenders to Sri Lanka, a country of 22 million that is facing its worst economic crisis in seven decades.
India wrote to the IMF earlier this month, saying it would commit to supporting Sri Lanka with financing and debt relief, but the island nation also needs China’s support to reach a final deal with the global lender.
However, China’s Jan. 19 letter to the Ministry of Finance may not be enough for Sri Lanka to immediately receive IMF approval for the critical loan, Sri Lankan sources with knowledge of the matter said.
According to the letter, China EximBank said it would grant “an extension of the debt service due in 2022 and 2023 as an immediate emergency measure” upon Sri Lanka’s request.
“You are not required to repay the principal amount and interest due on the bank loans during the above period,” the letter reads, adding that China EximBank wants to speed up the negotiation process with your side on the medium- and long-term debt treatment period.
By the end of 2020, Sri Lanka owed $2.83 billion, or 3.5% of the island’s external debt, according to IMF data from China EximBank.
Overall, Sri Lanka owed $7.4 billion to Chinese lenders by the end of 2022, or nearly a fifth of the public external debt, calculations by the China Africa Research Initiative showed.
“The bank will support Sri Lanka in its application for the IMF’s Extended Fund Facility (EFF) to ease liquidity strain,” China’s letter added.
An IMF spokeswoman confirmed that the IMF’s management had received India’s pledge, but did not comment on the Chinese letter.
Sri Lanka’s foreign and finance ministries and China’s foreign ministry did not respond to questions from Portal.
A Sri Lankan source, who asked not to be named due to the sensitivity of the confidential talks, said the country had hoped for a clear assurance from Beijing, similar to what India had given the IMF.
“China was expected to do more,” the source said, “which is much less than what is being asked and expected of them.”
DEBT SUSTAINABILITY
In a letter addressed directly to the IMF last week, India said funding or debt relief from the Export-Import Bank of India was consistent with restoring debt sustainability under the IMF-backed programme.
Another government source with direct knowledge of the talks told Portal that Sri Lanka is likely to share China’s letter with the IMF and seek their views on its content to assess whether stronger assurances are needed.
Comparing the letters showed that India “broadly” recognizes the IMF’s debt restructuring parameters for middle-income countries like Sri Lanka, another person with knowledge of the debt discussion added. Meanwhile, China’s letter only points out that replenishing foreign exchange reserves is crucial for Sri Lanka without referring to the ratios of debt and financing needs, the person said.
“The fact that China’s letter could be acceptable to the IMF is being watched very closely by all private creditors,” the person said on condition of anonymity.
It’s unclear what debt relief big lenders like China — the world’s largest bilateral lender — and India are willing to provide later.
Western countries like the United States and multilateral lenders are urging Beijing to offer debt relief to emerging economies in distress and have criticized Beijing for slow progress.
News from Zambia on Monday, however, suggests China could play a more proactive role. The head of the International Monetary Fund, Kristalina Georgieva, said in a speech in the capital Lusaka that the lender had reached an agreement in principle with China on a debt restructuring strategy.
China will de facto accept a reduction in NPV (net present value) on the basis of a significant lengthening of maturities and a reduction in interest rates, Georgieva said.
Sri Lanka’s central bank governor P Nandalal Weerasinghe said on Tuesday the country hopes to complete its debt restructuring in six months.
Reporting by Devjyot Ghoshal and Uditha Jayasinghe, additional reporting by Jorgelina do Rosario and Karin Strohecker; Edited by Jacqueline Wong, William Maclean and Emelia Sithole-Matarise
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