Sri Lanka says debt restructuring talks are moving forward – The Diplomat

Pulse | Economy | South Asia

India has already given the necessary guarantees to the IMF. Other bilateral creditors, including China, have yet to do so, but Sri Lanka says there is progress in ongoing discussions.

The debt-ridden head of Sri Lanka’s central bank said on Wednesday that the country was making good progress in talks with its creditors to obtain financial guarantees for a debt restructuring, an important step towards completing the International Monetary Fund’s bailout plan.

Sri Lanka is bankrupt and has put its $51 billion foreign debt on hold, of which $28 billion is due by 2027.

He reached a preliminary agreement with the IMF for a $2.9 billion aid package over four years. Its completion depends on debt restructuring guarantees from creditors, including China, India and the Paris Club, a group of major creditor countries.

India announced last week that it had assured the IMF of facilitating the rescue plan. India has provided an official $4.4 billion loan to Sri Lanka, excluding other forms of lending.

“Other bilateral lenders, the Paris Club, China and small bilateral lenders are in the process of providing financial guarantees,” Sri Lankan Central Bank Governor Nandalal Weerasinghe said.

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“The process is going very well,” Weerasingh told reporters in his office, saying the country hopes to get “the necessary financial guarantees from all of our creditors in a very short period.”

Over the past decade, Sri Lanka has borrowed heavily from China for infrastructure projects, including a seaport, an airport and a city being built on reclaimed land. The projects did not generate enough income to pay off the loans, which was a factor in Sri Lanka’s economic problems.

China accounts for about 20 percent loans to Sri Lanka, making it the state’s largest bilateral creditor. This means that Beijing’s cooperation in the debt restructuring process is critical. In general, however, China is often reluctant to write off debts for fear that other debtor countries will demand similar treatment. Beijing prefers to suspend payments as temporary assistance.

Sri Lanka’s economic crisis and resulting shortages of food, medicine, fuel and cooking gas sparked riots last year, forcing the president to flee the country and then resign.

Since then, Sri Lanka has shown some signs of progress, with shortages reduced and daily functions restored. However, daily power outages continue due to lack of fuel, and the government is struggling to find money to pay civil servants’ salaries and perform other administrative functions.

He announced this month that he is cutting 6 percent of each ministry’s budgets this year and plans to cut the size of the military, which has swelled to more than 200,000 due to a protracted civil war. The government plans to cut the size of the armed forces by almost half by 2030.