The Sri Lankan government has confirmed that it has concluded a preliminary deal with China on restructuring its debts to Beijing, seen as a big step in the cash-strapped country’s economic recovery. In a statement issued on Wednesday, the Ministry of Finance said, “The Government of the Democratic Socialist Republic of Sri Lanka is pleased to announce that it has reached an agreement on the key principles and indicative terms of a debt treatment with the Export-Import Bank of China.”
According to the statement, the two sides agreed that “the arrangement will be a significant milestone towards restoring long-term debt sustainability and will pave the way for a prompt economic recovery.” The agreement, in principle, covers around $4.2 billion of outstanding debt. According to the statement, it will allow the government to restructure its debts and restore foreign reserves.
The announcement comes ahead of the IMF’s first on-site review of Sri Lanka, which ends this week. The government hopes to facilitate the approval of a second tranche of the multilateral lender’s $2.9 billion bailout program later this year.
Creditors have been pressing for a more comprehensive solution to Sri Lanka’s debt problem, which has exacerbated corruption scandals and mismanagement of state-owned enterprises. It has been accused of excessive borrowing on international capital markets to fund “white elephant” projects. The current debt crisis has left the South Asian island nation in a severe recession.
Reuters reported last month that Chinese officials were talking with the IMF and other debt-holders known as the Paris Club to discuss a possible restructuring for the country. The IMF has previously said it would welcome any debt restructuring deal with China but needed to be within its framework of policy guidelines.
At a press conference on Tuesday, Minister of Finance Ranjith Siyambalapitiya said the new agreement with China was a big step for the country. “The agreement will benefit the country and its people,” he said. He also hoped that the agreement with China would help to expedite the IMF program.
China has a long history of facilitating sovereign debt relief for developing countries. However, it is less generous than some regional rivals regarding debt write-offs or moratoriums. In a letter to the IMF last month, EXIM, the state-owned export development bank, offered a two-year moratorium on Sri Lanka’s China-related debt. According to sources familiar with the matter, the offer needed to meet the requirements set by the IMF for middle-income countries.
But a senior minister at the Ministry of Foreign Affairs said that China was likely to share its letter with the IMF and seek its opinion on whether more substantial guarantees were required to be considered sufficient progress toward a complete debt restructuring. The official added that the letter appeared to be a “softening” of China’s previous stance. He could not provide a timeline for when an agreement would be reached.