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Understanding Sri Lanka’s Debt Restructuring: Implications for Future Sovereign Debt Overhauls

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By: Salman Akhtar
Understanding Sri Lanka’s Debt Restructuring: Implications for Future Sovereign Debt Overhauls

 

Major Creditors Advocate for Sovereign Debt Overhaul, Excluding China

A committee of official creditors, including major economic powers such as the US, Japan, and India, is pushing for a deal to restructure the debt of Sri Lanka. Interestingly, China, which holds about 10% of Sri Lanka’s external debt, is not included in this committee and is engaged in separate bilateral talks. The plan for this proposed deal is being drafted in anticipation of the upcoming International Monetary Fund (IMF) and World Bank meetings.

The exclusion of China in the restructuring process has raised questions about whether this move is strategic, aimed at pressuring China, or a sign of dwindling patience with the Asian giant’s involvement in sovereign debt restructuring. This situation serves as a test case for future Chinese involvement in similar debt overhaul scenarios.

Sri Lanka’s Economic Crisis and the Role of Debt Restructuring

Sri Lanka is currently navigating an economic crisis, and successful debt restructuring could help the country recover and regain investor confidence. The country announced its first sovereign default on April 12, leading to an urgent need to restructure its foreign debt. The role of China, as the largest bilateral creditor, in this restructuring process has garnered significant global attention, given the widespread debt distress across emerging markets and China’s substantial lending to these countries over the past decade.

The IMF has engaged in discussions with Chinese authorities regarding their role in addressing the emerging market debt crisis, with a special focus on Sri Lanka. The talks have reportedly been fruitful, and the IMF sees potential for a platform for more systematic engagement on debt issues where China can play an active role. However, the lack of firm financing assurances from bilateral creditors so far has delayed the process.

(Read Also: Sri Lankan President Heads to Berlin Global Dialogue)

Decoding Sri Lanka’s Debt to Chinese Creditors

To understand the role of China in Sri Lanka’s debt restructuring process, it’s crucial to comprehend the exact amount Sri Lanka owes to Chinese creditors and the composition of these loans. As of the end of 2021, Sri Lanka’s debt to Chinese creditors amounted to approximately $7.3 billion or 19.6% of Sri Lanka’s total outstanding foreign debt.

The largest share of Sri Lanka’s foreign debt consists of Eurobonds, which accounted for 36% of the country’s public and publicly guaranteed foreign debt by the end of May 2022. It is noteworthy that the exclusion of debts recorded under state-owned enterprises (SOEs) from the central government debt in Sri Lanka and the classification of term loans obtained from the China Development Bank as market borrowings instead of bilateral debt have led to underestimations of Sri Lanka’s Chinese debt stock.

(Read Also: Rising Tide of Fare Evasion: A Close Look at Increased Ticket Inspections on Sri Lanka’s Railways)

The Path Forward

The current situation in Sri Lanka serves as a learning opportunity for countries and international institutions dealing with sovereign debt crises. The success of Sri Lanka’s debt restructuring, particularly the bilateral negotiations with China, will set a precedent for future negotiations involving China and other major creditors. However, to achieve a successful debt restructuring, it is essential to create a comprehensive and realistic financial plan that addresses the concerns of all stakeholders while ensuring the country’s economic stability and growth.

As Sri Lanka navigates this financial crisis, other nations, creditors, and international financial institutions will be watching closely. The outcomes will not only shape Sri Lanka’s economic future but also influence global strategies for sovereign debt restructuring and crisis management.

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