Sri Lanka finalises key debt restructuring deal with bilateral lenders, India plays critical role

New Delhi: Just months away from elections, the Sri Lankan government, led by President Ranil Wickremesinghe, has managed to stave off a rising debt crisis with India playing a critical role in ensuring a debt restructuring deal for the island nation.

Diplomatic sources in Colombo say China — which was not part of the Official Creditors Committee (OCC) chaired by India, Japan and France — has also agreed to the “same terms”.

Sources added that next week the agreement will go to the Sri Lankan parliament for ratification and there is “confidence” that all elements across the political spectrum will be in favour of it.

Under the debt restructuring deal with its official creditors, Sri Lanka has secured a moratorium on foreign debt repayments until 2028. According to data from the Sri Lankan Finance Ministry, Sri Lanka owes a total of $10.5 billion to bilateral lenders.

China is owed $4.6 billion, India $1.3 billion and Japan $2.3 billion. The OCC consists of India, Hungary and members from the ‘Paris Club’ which comprises 15 countries like the US, UK and Russia. Therefore, total debt owed to the OCC is about $5.6 billion.

The Quarterly Debt Bulletin 2024 | First Quarter | Sri Lanka's Ministry of Finance, Economic Stabilization and National Policies

Source: The Quarterly Debt Bulletin 2024 | First Quarter | Sri Lanka’s Ministry of Finance, Economic Stabilization and National Policies

A combination of poor government policies, including former President Gotabaya Rajapaksa’s change in the tax regime in November 2019, the Covid-19 crisis and other factors left Sri Lanka unable to pay its foreign debts in mid-2022.

India was one of the three co-chairs of the OCC, along with France and Japan, that was set up after Sri Lanka defaulted on its foreign debt in 2022, for the first time since the country’s independence.

Apart from signing an MoU with the OCC Wednesday, Sri Lanka also signed a deal with China’s EXIM bank, which is the largest bilateral lender to the island nation.

The China Development Bank is classified as a commercial creditor and an agreement with them is expected to be finalised along with the bondholders.

“Even though China was not a part of the OCC, their representatives participated in OCC meetings as observers and attended OCC preparatory meetings. China has cooperated well with Sri Lanka and the rest of the bilateral lenders in the negotiations,” said Rehana Thowfeek, Sri Lankan economist and Director at Colombo-based think tank, Arutha.

‘Moving towards reform & growth’

While congratulating Colombo on the debt restructuring deal, which will provide the nation (which relies on over 60 percent of imports) much economic reprieve, New Delhi said the milestone demonstrates the strong progress made by Sri Lanka in “stabilising” its economy and “moving towards reform and growth”.

India has also extended roughly $4 billion towards Sri Lanka in food and financial assistance, including 40,000 MT of much-needed petrol in May 2022 at a time when the island nation was reeling under a fuel crisis.

The debt restructuring deal with official creditors will also help take forward Sri Lanka’s $2.9 billion programme with the International Monetary Fund (IMF).

“India has been a big help to a needy neighbor, and their support is highly appreciated in Sri Lanka,” Rishan de Silva, Executive Director of Colombo-based think tank, the Geopolitical Cartographer, told ThePrint.

“Adhering to our international obligations will be the utmost priority for whomever comes into power after the election, so that Sri Lanka doesn’t go back to square one and default on its foreign debt again,” he added, given the moratorium agreed to with official creditors ends only four years from now.

Presidential elections are scheduled to be held in Sri Lanka in September-October this year. Incumbent president Ranil Wickremesinghe is expected to run for re-election, though he is yet to issue an official statement. Wickremesinghe has technically not won the people’s mandate since in July 2022, he was elected by lawmakers after Gotabaya Rajapaksa resigned following weeks of nationwide protests.

In an address to the nation Wednesday, Wickremesinghe said: “All bilateral loan payments to foreign countries will be postponed till 2028. Additionally, Sri Lanka will have until 2043 to repay these loans on concessional terms”.

(Edited by Zinnia Ray Chaudhuri)