19 November 2022 10:36 pm
Sri Lanka is likely to miss the December deadline for securing the International Monetary Fund (IMF) loan since the main bilateral debtor China has shown little or no interest in restructuring debt with Sri Lanka, financial analysts based in Washington DC said.
If Sri Lanka missed the December IMF deadline, it will have to wait for March 2023 to secure a USD 2.9 billion loan from the IMF in eight equal tranches.
On September 1, the IMF Staff and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka's economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about USD 2.9 billion.
It said debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps.
Financing assurances to restore debt sustainability from Sri Lanka’s official creditors and making a good faith effort to reach a collaborative agreement with private creditors are crucial before the IMF can provide financial support to Sri Lanka, the IMF said while announcing the credit facility.
In response to IMF Bailout, Japanese Ambassador in Sri Lanka Hideaki Mizukoshi said Japan stands by Sri Lanka in support of the debt restructuring negotiation process so that Sri Lanka can reach a final agreement with the IMF.
Accordingly, India and Japan have already initiated a dialogue with Sri Lanka on debt reconciliation and restructuring. However, China is still to engage in the dialogue as Beijing was involved in the 20th National Party Congress and had little time for client state Sri Lanka.
The total debt of Sri Lanka was USD 36 billion at the end of 2021. Of this, Sri Lanka owes USD 7.1 billion to China, or 20 percent of its debt. The total public debt, which was 115.3 per cent of the GDP in end-December 2021, has now gone up to 143.7 per cent of the GDP by end-June 2022.
Even before the IMF agreed upon releasing a financing loan to Sri Lanka, it said the country needed to initiate talks with China on debt restructuring.
"China is a big creditor, and Sri Lanka has to engage proactively with it on a debt restructuring," IMF's Asia and Pacific Department Director Krishna Srinivasan told Reuters.
If Sri Lanka is unable to secure the much-needed IMF loan in December due to its main ally and debtor China’s lacklustre response to initiate talks, Sri Lanka will go through major hurdles in terms of economy and politics.
On October 31, 2022, Sri Lankan President Ranil Wickremesinghe said obtaining the loan and having talks with creditors is a long process.
“If we can move and come to an agreement by December, which means coming to an agreement by mid-November, and going up to the IMF Board in mid-December, we will gain a big advantage. However, I don’t know whether we can do it for the simple reason that in China the focus has started now after the 20th party congress. However, we must aim to have it by January,” Mr. Wickremesinghe said.
The economic crisis in Sri Lanka is due to mismanagement, poor fiscal discipline and alleged corruption by the Rajapaksa regime, who secured a 900-megawatt Norochcholai Power Station with Chinese help after taking a loan from Beijing apparently at 11 percent interest. The white elephant projects undertaken by Sri Lanka with Chinese assistance have led the country deep into an economic black hole with no signs of recovery at least in the next five years.
China was blamed for dragging Sri Lanka into a debt trap because of the higher commercial loans it has given without assessing project viability and return on investment. China has rejected these allegations.
Sri Lanka, which is now going through a serious economic crisis, suspended all foreign debt repayments since April 12 this year because it ran out of foreign currency reserves and no offshore lender was willing to give money.
Sri Lankan government officials said that the timing of the IMF loan disbursement will mainly be depending on China’s decision on its bilateral and commercial debt restructuring modalities.
State Minister of Finance Shehan Semasinghe said the country is holding the second round of talks with its main bilateral creditors China, Japan and India.
Of the three bilateral donors, China has not responded positively to Sri Lanka’s requests for debt restructuring.
Meanwhile, President Wickremesinghe, who met the Managing Director of the IMF at the COP27 climate summit in Egypt, called on China and Japan to complete debt talks by December.
“We now have to complete discussions with India and China. China told us to talk after the party congress. We have done it now. We are asking both countries to complete this by the end of December,” he said.
Several civil organizations meanwhile visited the Chinese Embassy in Colombo to request China to support Sri Lanka's debt restructuring efforts. However, the Chinese Embassy in Colombo reportedly refused to accept the letter from the civil organizations.