IMF-Sri Lanka debt restructuring deal on back foot as main creditor China remains silent

Sri Lanka and the International Monetary Fund (IMF) have reached an agreement on debt restructuring, which will begin only after all Sri Lankan creditors agree to restructure their existing loans to the island nation. Prior to the IMF beginning to disburse a USD 2.9 billion loan, all Sri Lankan creditors, including China, must agree to restructure their existing loans to the island nation.

However, China has remained silent on the matter, and IMF bailout discussions are still only at the staff level of agreement, according to Colombo Gazette. The IMF and Sri Lanka have reached a USD 2.9 billion agreement, but money won't start to flow to Colombo until there has been a major improvement in the debt restructuring with China, Japan, and India primarily.

A staff-level agreement has been achieved between the IMF staff and the Sri Lankan government to support Sri Lanka's economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) worth approximately USD 2.9 billion. The new EFF agreement will help Sri Lanka's programme to restore macroeconomic stability and debt sustainability, while also protecting financial stability, reducing corruption risks, and unlocking the country's growth potential.

Creditors' refusal to provide debt restructuring assurances would add to the problem

One of the conditions was to reduce corruption vulnerabilities by improving fiscal transparency and public financial management, implementing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic with IMF technical assistance, according to the Colombo Gazette.

On September 1, during a press conference with IMF officials in Colombo, the question of what would happen if China refused to commit to debt restructuring was raised, and the IMF mission head responded, "If one or more creditors are unwilling to provide these assurances, that would obviously aggravate the problem here in Sri Lanka and undermine repayment capacity."

China has so far refused to agree to debt restructuring, which could include haircuts or interest rate reductions. Instead, according to Lankan officials, China has expressed its willingness to refinance Sri Lanka's previous loans without any changes. According to Beijing, as a traditional friendly neighbour of Sri Lanka and a major shareholder of the International Monetary Fund, China has always encouraged the IMF and other international financial institutions to play a positive role in supporting Sri Lanka's response to current difficulties and efforts to alleviate debt burden and realise sustainable development.

Image: AP