IMF bailout discussion on Sri Lanka debt restructuring still on lower pedestal as China keeps mum

Colombo [Sri Lanka], September 13 : Sri Lanka has reached an agreement with the International Monetary Funds (IMF) regarding debt restructuring which will start only after all Sri Lankan creditors agree to restructure their existing loans to the island nation. On the other hand, while China keeps mum over the issue, IMF bailout discussions still remain at the staff level of agreement.
All Sri Lankan creditors including China have to agree to restructure their existing loans to the island nation before the IMF starts disbursing a USD 2.9 billion loan, but China's silence on the issue and IMF bailout discussions still remain at the staff level of agreement, Colombo Gazette reported.
Sri Lanka has agreed to a USD 2.9 billion deal with IMF officials, but cash will not flow to Colombo until significant progress is made on debt restructuring with China, Japan and India mainly.
The IMF staff and the Sri Lankan authorities have reached a staff-level agreement to support Sri Lanka's economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about USD 2.9 billion.
The new EFF arrangement will support Sri Lanka's program to restore macroeconomic stability and debt sustainability, while safeguarding financial stability, reducing corruption vulnerabilities and unlocking Sri Lanka's growth potential.
One of the conditions was also to reduce corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance, Colombo Gazette reported.
At a recent press conference with IMF officials in Colombo on September 1, the question of what would happen if China refused to commit to debt restructuring was raised, to which the IMF mission head replied, "If one or more creditors are unwilling to provide these assurances, that would obviously aggravate the problem here in Sri Lanka and undermine repayment capacity."
China has so far not agreed to debt restructuring which could include haircuts or reductions in interest rates. Instead, China has expressed its willingness to refinance Sri Lanka to repay its past loans without any changes, said Lankan officials.
Beijing said as a traditional friendly neighbour of Sri Lanka and a major shareholder of the International Monetary Fund, China has been always encouraging the IMF and other international financial institutions to continue to play a positive role in supporting Sri Lanka's response to current difficulties and efforts to ease debt burden and realize sustainable development.
As to the bilateral financial cooperation, shortly after the Sri Lankan government announced to suspend of international debt payments in April 2022, Chinese financial institutions reached out to the Sri Lankan side and expressed their readiness to find a proper way to handle the matured debts related to China and help Sri Lanka to overcome the current difficulties. "We hope Sri Lanka will work actively with China in a similar spirit and work out a feasible solution expeditiously," Colombo Gazette reported.
Sri Lankan Foreign Minister Ali Sabry is optimistic that China will agree to restructure its loan repayment, as have Japan and India. In addition, President Ranil Wickremesinghe is planning a visit to Japan on September 25, 2022, in order to suggest that Japan summon the creditors to assist Sri Lanka in obtaining an IMF bailout.
Since Sri Lanka gained independence in 1948, there has never been a crisis of this magnitude; it was brought on by years of poor financial management by succeeding Sri Lankan governments and the Gotabaya Rajapaksa regime's choice to forego addressing the IMF to prevent the country from amassing debts.
The current situation has driven people from their homes to work overseas, and flee illegally on boats to neighbouring India and Australia besides serious unrest that led to the detention of youths under the harsh Prevention of Terrorism Act.
Several protests took place against the government when the financial crisis had a negative influence on food security, the availability of gasoline, and the price of cooking gas.
The government of Gotabaya was warned for rejecting the International Monetary Fund (IMF) bailout to relieve the people from mounting debts that the government had to repay. The former Central Bank governor Ajith Nivard Cabraal without taking an independent decision basically did politics to avoid IMF bailout and sought countries like China to support Sri Lanka.
China has been a close associate of the Rajapaksa regime and accused of corrupt dealings with them. The government by then had defaulted foreign debt payments to several countries too and the country sank.
The country owes more than USD 51billion to foreign lenders, including USD 6.5 billion to China. The G7 group of countries - Canada, France, Germany, Italy, Japan, the UK and the US - had said it supports Sri Lanka's attempts to reduce its debt repayments.
Despite China being convinced that Sri Lanka needs the IMF bailout, China is concerned about caving in to US pressure since the US is a geopolitical adversary, Colombo Gazette reported.
The IMF bailout of Sri Lanka in fact could be a roadblock to China's ability to finance Sri Lanka and secure additional infrastructure projects for its strategic Belt and Road Initiative (BRI).
One of the IMF's requirements is that the crisis-hit Sri Lanka should refrain from pursuing any further loan-facilitated projects. The IMF has also determined that some of Sri Lanka's major Chinese projects have been ineffective and that Sri Lanka cannot proceed with similar endeavours in the future. Also, the US is using subtly the IMF facilities to control China's maritime power struggle.
Sri Lanka is one of China's BRI's choke points. China is at a crossroads now. It must either restructure its debt or antagonize Sri Lanka and become a laughingstock in the South Asian region. There is speculation that China would suggest it will refinance the debt including the interest.
The impasse will persist until China relents. Sri Lanka will know whether or not debt restructures by Sri Lanka's creditors is successful after the donor conference in Japan that is scheduled to take place. If the IMF bailout does not materialize, there is also the possibility that Sri Lanka may turn to China for help, the report said.
However, Sri Lanka has undoubtedly leveraged its strategic location to maintain the confrontation between China and the West in order to defuse its desire to gain from these major powers.