Ask and you shall, hopefully, receive

The Central Bank of Sri Lanka has encouraged China and India to agree on a loan write-down as soon as feasible. The crisis-hit State missed debt payments and arranged a 2.9 billion dollar rescue. The International Monetary Fund, however, would not release the funds until China and India agree to decrease Sri Lanka’s billions of dollars in debt.

In a BBC interview, the Central Bank Governor argued that it was in everyone’s best interests to move promptly. As a creditor repays us, its debtor, the cash made available provides some relief on the funds we owe and necessary imports. As of now, India has informed the International Monetary Fund that it will support Sri Lanka’s debt restructuring proposal, as the nation races to seek a rescue from the global lender.

According to the World Food Program, eight million Sri Lankans – more than a third of the population – are currently food insecure, with hunger particularly concentrated in rural areas. According to the World Bank, Sri Lanka’s economy will fall by 9.2% in 2022 and another 4.2% this year.

Beijing has lent over 7 billion dollars to Sri Lanka, whereas India owes approximately a billion. According to independent analysts, China is concerned about the implications of a significant Sri Lankan debt write-down for its considerable lending to other developing countries through its Belt and Road initiative. Meanwhile, India is thought to be leery of receiving preferential debt restructuring terms from its regional rival, China.

Sri Lanka is aiming to deepen an existing FTA with its northern neighbour India into an Economic and Technology Agreement after talks stalled in 2018. It is looking to add services and investment to the current agreement that primarily covers trade in goods. FTA discussions with China, the island’s largest bilateral lender, also stalled in 2018 over disagreements about the pace of liberalising of Sri Lanka’s economy, Weerasinghe said. Both countries have responded positively to resuming talks but specific dates are yet to be finalised, Weerasinghe added.

US Ambassador Julie Chung stated that China, as the largest bilateral lender, bears the greatest responsibility to move. For the benefit of the Sri Lankan people, we hope China does not play spoiler in their pursuit of the IMF deal. However, even if India and China agree to write down their loans to Sri Lanka, another potential issue arises in the form of private creditors, who account for 40% of the country’s external debt stock.

In the years following Argentina’s economic crisis and default in 2001, some American hedge funds wanted full repayment and took the country’s Government to court to obtain it, rather than accepting a restructuring of the sovereign bonds they had purchased on the open market. On 8 January, a big group of international economists urged for the cancellation of Sri Lanka’s bonds, which is a simple but reputationally damaging way out.

President Ranil Wickremesinghe said on Friday that he was looking for measures to accelerate Sri Lanka’s economic recovery with the help of the IMF and the country’s primary creditor nations, Japan, India, and China, which would have to be supplemented by additional bad news. These observations were expressed by the President during a meeting with labour union representatives in the President’s Office. Government, semi-Government, and private sector trade union leaders and delegates attended the summit, which was presided over by the President and Prime Minister and explored possible remedies to the country’s economic and financial crises.

When everything is in place, we will receive $ 2.9 billion from the IMF in three or four instalments. With confidence restored in Sri Lanka’s financial situation, we should be able to get additional aid of approximately $ 5 billion from the World Bank and ADB. The President then anticipates that economic stability would improve after the first quarter of 2023, with a move to a growth path in 2024.