Sri Lanka has begun debt restructuring talks with China that will test whether Beijing and rival lenders such as India can put aside their differences to help the island escape its economic crisis.
“We are sure that China will assist us in these difficult times,” Sri Lanka’s president Ranil Wickremesinghe said in parliament on Thursday as he announced the launch of talks with Beijing. “It is our expectation now to come to a common agreement as soon as possible.”
Crisis-hit Colombo’s negotiations with its creditors have become a barometer of how lenders respond to rising global debt distress, with Beijing’s role drawing particular international scrutiny.
Sri Lanka, whose struggles with goods shortages, rising hunger and political unrest have made it a symbol of global economic turmoil, owes around $50bn in foreign debt to private bondholders such as BlackRock as well as countries including China, Japan and India.
Wickremesinghe said initial talks with Beijing had begun and would restart after the Chinese Communist party congress this month. China, which has lent around $7bn to Sri Lanka through its Belt and Road infrastructure project, had previously resisted Colombo’s requests to restructure debt or to offer substantial further assistance.
But with its scale as a lender to the developing world growing rapidly in recent years, Beijing has been dragged into several negotiations and in recent months agreed assistance for countries including Zambia and Ecuador.
One Sri Lankan official said “the lack of trust” between creditors such as China and India, which both compete for political influence on the island, remained the biggest obstacle to securing commitments needed to unlock an IMF rescue package.
“A lot of this is outside of Sri Lanka’s control,” the official said. “It’ll depend on what happens between India, China and Japan over the next few months.”
On Thursday, Wickremesinghe said he had asked Japan to co-chair a creditors’ conference and that he had also sought support from India.
The IMF last month agreed a preliminary, staff-level agreement for a $2.9bn support package to Sri Lanka. But creditors must commit to backing a restructuring before the IMF’s board will release the funds.
Sri Lanka’s government said last month it wanted to finalise the IMF deal by December and complete its debt restructuring with creditors by mid-2023.
Officials and analysts expect this timetable to prove difficult to achieve. Creditor nations have so far resisted Sri Lanka’s requests to form a committee that would speed up the talks, with the relationship between Beijing and New Delhi in particular poisoned by border clashes.
As a middle-income country, Sri Lanka also has less recourse to global initiatives designed to help poorer nations such as Zambia.
Sri Lanka will not get soft treatment from creditors, said Manjuka Fernandopulle, a debt restructuring lawyer in Colombo, adding that the country’s case was more complicated than other recent restructurings such as in Zambia and Suriname.
In those cases, “you didn’t have big bondholders, you didn’t have big loans [or] the spectrum of bilaterals that are involved in this. It’ll be the first time that they’re all engaging with each other,” Fernandopulle said.
Japan and France, which is chair of the Paris Club group of mostly western bilateral lenders, have asked China and India to join in a co-ordinated effort to resolve Sri Lanka’s debts, but have yet to receive a response.
Sri Lanka’s external bonds maturing this year through to 2030 are trading at less than 30 cents on the dollar, according to Bloomberg, suggesting investors see a restructuring deal as a distant prospect.
The island’s fiscal problems were long in the making. Former president Gotabaya Rajapaksa, who protesters forced out of office in July, enacted large tax cuts in 2019 while borrowing heavily for politically motivated infrastructure projects.
Sri Lanka’s economic unravelling was a warning to others as the pandemic and surge in global inflation following Russia’s war in Ukraine exacerbated fiscal strains around the world.
The IMF says 30 per cent of emerging economies and 60 per cent of low-income countries are in or at high risk of debt distress. The World Bank has warned of a coming wave of sovereign defaults by poor countries.
This has focused attention on global efforts to manage unsustainable debts. A G20 initiative to provide short-term debt service suspension to low-income countries during the pandemic ended last year, leaving 46 countries struggling to make up the deferred payments.
And only three countries have signed up for the G20’s “common framework” for debt treatment, with Sri Lanka not eligible.
For Sri Lankans, the crisis has come at a heavy cost. The import-dependent island has struggled with severe shortages of everything from medicine to food, with multi-hour blackouts, debilitating fuel queues and a dramatic drop in living standards.
While some of these shortages have eased, year-on-year consumer price inflation in September rose to a record of 70 per cent, with food inflation at nearly 94 per cent. Aid groups warn that hunger has surged.
“Food affordability, malnutrition, skipping meals, reducing spending on health — that’s become the biggest crisis,” said Anushka Wijesinha, an economist at Colombo think-tank Centre for a Smart Future.