Some creditors want to restructure Sri Lanka’s debt without China

Some members on the committee of Sri Lanka’s official creditors are pushing to reach a deal to restructure the nation’s debt without the participation of China, Bloomberg News reported on Wednesday citing people familiar with the matter.

The members want the group of major creditors, including the US, Japan and India, to sign a memorandum of understanding with Sri Lanka around the time of the International Monetary Fund and World Bank meetings scheduled for next month in Marrakesh, Morocco, said the people, who asked not to be identified as the discussions are private. China, which held about 10% of Sri Lanka’s external debt as of the end of last year, isn’t a part of the group and is pursuing separate bilateral talks.

Before the Marrakesh gathering, key debt holders excluding China are planning on putting together the draft outline and getting Sri Lanka’s consent, the people said, adding that some discord remains within the group.

An official at the Paris Club, one of the largest debt holders, said a timeline for the agreement could not be confirmed. Representatives at the IMF’s Colombo office weren’t immediately available for response.

“All creditors are engaging positively with us,” Shehan Semasinghe, Sri Lanka’s junior finance minister, said by phone when asked about the development.

It remains unclear whether the creditors have lost patience with China or if the move is a negotiating tactic to pressure Beijing to get on board. Although Sri Lanka is a relatively small economy, its debt restructuring is seen as a test case for Chinese participation in sovereign debt overhauls.

Proceeding without China — the world’s largest sovereign creditor — would mark a setback for global efforts to get President Xi Jinping’s government to join a new international system to provide relief to indebted countries that have already dragged on for almost two years. A combination of the debt hangover from the pandemic, a rising dollar and soaring US interest rates has left a growing number of poor countries without the means to pay off what they owe and in need of international help.

How China will react to the deal remains to be seen. In the past China has quietly negotiated its own opaque restructurings with its debtors, often without providing any meaningful long-term relief.

“I would re-emphasize that China supports domestic financial institutions to negotiate a settlement agreement with Sri Lanka,” Chinese Ministry of Foreign Affairs spokesman Wang Wenbin said in Beijing on Tuesday.

Sri Lanka stands to benefit from any deal with creditors, even if China is excluded. The IMF’s first on-site review of the country’s $3 billion bailout program ends Wednesday, and an agreement on debt restructuring would give hope that the South Asian nation’s recovery from an unprecedented economic crisis will get a boost before the multilateral lender gives its conclusion later this year.

Among the creditors, Paris Club members accounted for $4.8 billion, or more than 10% of Sri Lanka’s external debt, according to IMF data as of year end. That’s slightly higher than China, which stands at $4.5 billion, while India is owed $1.8 billion.

The Paris Club is an informal group of official creditors that help coordinate repayments for struggling debtor nations, and is currently comprised of 22 members including France, Japan, the UK and the US.

Depending on how talks with official creditors progress, Sri Lanka could also make headway in its negotiations with private lenders. In July, Foreign Minister Ali Sabry said private creditors had “almost agreed” to a 30% haircut.

A successful restructuring will assist Sri Lanka in regaining a measure of investor confidence after the nation fell into default for the first time in its history last year. It would also help the island nation make its debt more sustainable as envisaged in the IMF bailout secured in March, and enable a flow of funding.

If the IMF’s review is favorable, it should pave the way toward Sri Lanka getting $330 million of disbursement from the IMF, the second installment from the bailout agreement. (Bloomberg)