China offers two-year debt moratorium to cash-strapped Sri Lanka | World News - Hindustan Times

China offers two-year debt moratorium to cash-strapped Sri Lanka

By, New Delhi
Mar 07, 2023 11:06 AM IST

While India has offered carte blanche support to Sri Lanka for IMF extended fund facility as per debt sustainability analysis which entails 10 year loan moratorium and 15 years for debt restructuring, China has offered only a two years debt moratorium to the Island nation that allowed Beijing a 99 year lease on Hambantota Port.

Although India has offered unconditional and open-ended support to Sri Lanka on the basis of IMF-Paris Club debt sustainability analysis, China on Monday offered a two-year loan moratorium to its close ally for the year 2022 and 2023 to relieve Colombo’s short-term debt repayment pressure.

File photo of Chinese President Xi Jinping with Sri Lankan President Ranil Wickremesinghe.(AFP file)
File photo of Chinese President Xi Jinping with Sri Lankan President Ranil Wickremesinghe.(AFP file)

The IMF-Paris club had proposed a 10-year moratorium on Sri Lankan debt and 15 year period for loan restructuring, Mr Zhang Wencai, Vice President of China’s Export and Import Bank, informed the Ranil Wickremesinghe government on Monday in writing that the Bank is going to provide an extension on the debt service due in 2022 and 2023 as immediate contingency based on the request from Colombo. This means that Sri Lanka will not have to repay the principal and interest due to the Bank’s loan during 2022 and 2023. The letter further stated that the bank would like to expedite the negotiation process with Colombo regarding the medium- and long-term debt treatment during 2023 with a view to finalize debt treatment in the coming months. This essentially means that China’s support to IMF’s extended fund facility of USD 2.9 billion over four years in eight six monthly instalments to Sri Lanka is conditional on the outcomes of the two-year moratorium.

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In the letter, the Chinese Exim Bank Vice President stated: “ The Bank will support Sri Lanka in your application for IMF EFF to help relieve the liquidity strain. In the meantime, adequate contributions from all the creditors would be a critical condition for a speedy solution as desired by all the parties. We will continuously call on commercial creditors (including the international sovereign bondholders) to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make corresponding contributions.”

The letter further stated: “Since your (Sri Lanka) announcement of the Interim Policy to suspend the servicing of external public debt in mid-April, 2022….the Bank has responded positively to your demand to roll over the principal and the interest payable in 2022 and 2023.

With the Chinese EXIM bank supporting the IMF process, Sri Lanka will get the first tranche of EFF after the executive board of the Bretton Woods Institution meets in Washington later this month. After the approval, Sri Lanka will have to enter into a bilateral agreement with creditor nations within six months so that the haircut on the loan taken is equally distributed. While Sri Lanka owes USD 7.4 billion in debt to China, it owes one billion USD to India as bilateral debt and another USD four billion given outside the bilateral debt during the food, fuel and medicine crisis in Sri Lanka in the past two years.

The Chinese EXIM bank claims to have financed a large number of roads, ports, airports and power projects in Sri Lanka out of which nearly 40 have been completed.

It is understood that the Chinese EXIM bank support for Sri Lanka had been communicated to the IMF, who in turn had informed Colombo as there was tremendous pressure on the Ranil Wickremesinghe government with foreign exchange reserves down to USD 500 million.

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    Author of Indian Mujahideen: The Enemy Within (2011, Hachette) and Himalayan Face-off: Chinese Assertion and Indian Riposte (2014, Hachette). Awarded K Subrahmanyam Prize for Strategic Studies in 2015 by Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) and the 2011 Ben Gurion Prize by Israel.

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