Sri Lanka (Commonwealth Union)_ In an attempt to assist the country to begin repaying their debts, the Central Bank of Sri Lanka has requested its creditors India and China to agree to a reduction in the amount of their loans as quickly as possible. According to the bank’s Governor P. Nandalal Weerasinghe, “The sooner they give us finance assurances that would be better for both sides, as a creditor, as a debtor. That will help us to start repaying their obligations”. He added, “We don’t want to be in this kind of situation, not meeting the obligations, for too long. That is not good for the country and for us. That’s not good for investor confidence in Sri Lanka.”
Sri Lanka, which is experiencing its greatest economic crisis since its 1948 independence, failed to pay its debt obligations and negotiated a $2.9 billion bailout. However, the International Monetary Fund (IMF) announced that it will not deliver the cash until India and China agreed to cut Sri Lanka’s several billion dollar debt. China has lent Sri Lanka over $7 billion, whereas India has provided approximately $1 billion. Initially, the Sri Lankan government aimed to reach a new payment arrangement with China and India by the end of 2022.
According to the estimation of World Food Programme, nearly 8 million Sri Lankans, or over one-third of the population, are food insecure with rural regions being most affected. Moreover, the economic crisis sparked a widespread protest across the nation in July of last year. The World Bank predicts that Sri Lanka’s economy contracted by 9.2% in 2022 and would decrease by 4.2% this year. Despite a minor decline in inflation since last year, food costs in Sri Lanka were 65% higher last month than they were a year ago.
According to Weerasinghe, it was likely that an agreement would be reached before the end of the month, but he added that it depends on the other parties or the creditors who have to take the decision. He also stated that Sri Lanka has now given them all the necessary details on the country’s borrowings. However, if India and China agree to reduce their loans to Sri Lanka, private creditors, who account for 40 percent of the country’s foreign debt, might pose a difficulty.
In response to a query about Sri Lanka’s private bondholders, the Governor replied, “We engage with private creditors in good faith negotiations. And what we are seeing is that they are very positive and they are willing to engage with us.” Weerasinghe expressed hopes that the IMF monies will be released to Sri Lanka within four to six weeks when an agreement is reached between bilateral creditors. According to independent experts, China is concerned about how the implications of a big Sri Lankan debt write-down will affect its massive Belt and Road loans to other developing nations. In the meantime, India is also concerned about receiving worse terms on debt restructuring compared to its regional rival, China.
Additionally, Julie Chung, US Ambassador to Sri Lanka, stated that China, as the largest bilateral lender, had more responsibility to make a decision. She added, “We hope that they do not delay because Sri Lanka does not have time to delay. They need these assurances immediately. For the sake of the Sri Lankan people, we certainly hope China is not a spoiler as they proceed to attain this IMF agreement”. The Governor’s words come only days after a significant number of foreign economists called for the cancellation of Sri Lanka’s bonds on January 8. They stated that all of Sri Lanka’s creditors must provide substantial debt cancellation in order to end the current situation.
