China Backs Sri Lanka Debt Plan, Sources Say, Paving Way for IMF Loan

The International Monetary Fund plans to decide on a $2.9 billion bailout for Sri Lanka after China gave assurances that it will support the nation’s debt restructuring, clearing the biggest hurdle for approval.

(Bloomberg) — The International Monetary Fund plans to decide on a $2.9 billion bailout for Sri Lanka after China gave assurances that it will support the nation’s debt restructuring, clearing the biggest hurdle for approval.

The IMF board will consider the loan on March 20 after China on Monday became the final creditor nation to confirm its participation. Fund staff and Sri Lanka agreed to the four-year deal in September, and the board typically backs the loan arrangements negotiated by staff.

IMF Managing Director Kristalina Georgieva said that she welcomed the progress by island nation’s authorities in taking “decisive policy actions and obtaining financing assurances from all their major creditors.”

“I look forward to presenting for approval Sri Lanka’s IMF-supported program,” Georgieva said in a statement. The so-called Extended Fund Facility “will support the authorities’ program of ambitious reforms, which will help Sri Lanka emerge from its current crisis and set it on a trajectory of strong and inclusive growth,” she said.

Her comments came after President Ranil Wickremesinghe told parliament earlier on Tuesday that China, Sri Lanka’s largest bilateral creditor, gave written assurance for the debt restructuring via the Export-Import Bank of China. Authorities signed the letter of intent for the IMF loan on Monday, he said.

The IMF and president said the loan will also spur financing from other creditors, including the World Bank and the Asian Development Bank, he and the nation’s president said.

Sri Lanka’s rupee surged by the most against the dollar in more than three decades while stocks rose 2% after Bloomberg News reported China has given its assurances.

The bailout talks dragged on for months as Beijing demanded that multilateral institutions such as the World Bank be part of any restructuring for debtor countries, raising tensions with the US.

Some optimism arose in February as finance chiefs from the Group of 20 nations aligned on the language on debt after their meetings. Since then, Beijing has extended a $2 billion loan to Pakistan while Premier Li Keqiang told IMF Managing Director Kristalina Georgieva last week that China is open to participating in multilateral efforts to help heavily indebted nations “in a constructive manner.”

The bailout will unlock more funding for Sri Lanka and set the bankrupt nation’s debt restructuring on a steadier path since last year’s default. The latest development may bode well for other vulnerable nations whose debt relief talks have also been slowed by disagreement of the world’s two superpowers on such issues. 

The experience of Zambia is a cautionary tale. It’s been six months since the IMF board approved $1.3 billion in loan to the southern African nation after China gave financing assurances in July together with other bilateral creditors. The path from the IMF’s final nod to getting actual funding relief has been paved with delays and roadblocks.

China has become the world’s largest government creditor to developing countries over the last decade, giving it a key role in talks over debt restructuring. Most of that lending has been done by state-owned banks, which can be reluctant to write down loans, as it can impact the promotion prospects of bank executives.

While paralyzing supply shortages in Sri Lanka have eased, foreign-currency reserves have been inching up and inflation somewhat cooling, the nation needs the IMF loan to get more funding and turn the situation around.

IMF financial support can only be provided for countries with sustainable debt. For those whose debt is classified as unsustainable, the Fund’s financing may proceed before a restructuring is completed if official bilateral creditors provide the IMF with adequate assurances that they will take steps to help restore debt sustainability.

Terms Unclear

It’s still unclear whether China Exim Bank is offering a reduction in Sri Lanka’s debt amount or is giving relief by extending maturities and lowering interest rates. The latter has been Beijing’s preferred approach, often making it hard to meet IMF relief requirements. 

“China calls on all other creditors of Sri Lanka, including multilateral and commercial creditors to provide debt treatment in an equally comparable manner to relieve Sri Lanka’s liquidity strain,” its embassy in the country said on its Twitter account.

On Monday, US Treasury Secretary Janet Yellen expressed support for Sri Lanka’s steps toward clinching an IMF program in her conversation with President Wickremesinghe. Yellen welcomed the nation’s “commitments to transparency and comparable treatment for all bilateral official and private creditors,” according to a readout. 

In the past months, Sri Lanka has increased taxes, cut energy subsidies and loosened its grip on the currency to secure the IMF loan. The central bank recently boosted borrowing costs further to ensure that inflation which has slowed from nearly 70% doesn’t flare up.

India and the Paris Club of creditors  — which includes Japan — have previously given their support to the island nation’s debt restructuring. Chinese lending to Sri Lanka accounted for almost 20% of the country’s public foreign debt in May 2022, according to research by the School of Advanced International Studies at Johns Hopkins University, while the World Bank and ADB held 10% and 15% shares respectively. Japan accounted for 8%.

Sri Lanka seeks to turn the corner after the bailout, expecting inflation to ease to single-digit levels by the end of 2023 as tourism and remittances pick up.

–With assistance from Karl Lester M. Yap, Zhang Dingmin, Tom Hancock, Ana Monteiro, Karthikeyan Sundaram, Matthew Hill and Malcolm Scott.

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.