China and India have been requested by the central bank of Sri Lanka to reduce their debts as quickly as possible. Sri Lanka’s central bank wants China and India to reduce its debts.
The insolvent Indian Ocean country missed debt payments and agreed to a $2.9 billion (£2.4 billion) bailout. However, the International Monetary Fund would not disburse the funds until China and India consent to lower Sri Lanka’s enormous debt.
The central bank governor of Sri Lanka told BBC Newsnight that prompt action was in everyone’s best interests.
P. Nandalal Weerasinghe said: “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.
Sri Lanka’s central bank wants China and India to reduce its debts because food costs in Sri Lanka were 65% higher last month than they were a year ago, despite the fact that inflation has decreased marginally since last year.
According to the World Food Programme, 8 million Sri Lankans, or more than a third of the country’s population, experience “food insecurity,” with hunger being particularly prevalent in rural areas.
Last year’s economic unrest triggered large-scale demonstrations, which led to the former president’s departure from the country in July.
According to projections from the World Bank, Sri Lanka’s economy shrunk by 9.2% in 2022 and will shrank by a further 4.2% this year.
Beijing has lent Sri Lanka over $7 billion, while it owes India about $1 billion. By the end of 2022, the Sri Lankan government had previously anticipated reaching an agreement on a new payment schedule with China and India.
Mr Weerasinghe said it was possible an agreement could come later in January but added “this all depends on the other parties – our creditors really have to make that decision”.
He continued by saying that Sri Lanka has now given them all the information they required regarding the country’s borrowings.
According to unaffiliated analysts, China is worried about the potential effects of a significant write-down of Sri Lanka’s debt on its vast lending to other developing nations through its Belt and Road programme.
India is reportedly cautious about receiving debt restructuring terms that are worse than those offered to China, a rival in the area.
The US ambassador to Sri Lanka, Julie Chung, said the greater onus to move was on China, as the biggest bilateral lender.
“For the sake of the Sri Lankan people, we certainly hope China is not a spoiler as they proceed to attain this IMF agreement.”
However, private creditors, who make up 40% of Sri Lanka’s external debt portfolio, could pose a concern if India and China ultimately decide to write down their loans to the country.
Following Argentina’s economic collapse and default in 2001, some American hedge funds wanted full repayment of the sovereign bonds they had purchased on the open market rather than settling for restructuring and sued the government of Argentina in US courts to do so.
A large group of international economists on 8 January called for Sri Lanka’s bonds, to be “cancelled”, writing: “All of Sri Lanka’s creditors must ensure debt cancellation sufficient to provide a way out of the current crisis.”
Asked about Sri Lanka’s private bondholders, Mr Weerasinghe said: “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. The governor said he expected that once agreement from bilateral creditors has been agreed the IMF funds could be distributed to Sri Lanka within “four to six weeks”.
