Sri Lanka’s ongoing economic crisis would deepen if China disagrees on debt restructuring, says a senior IMF official

“If one creditor or creditors are not willing to provide these assurances, that would indeed deepen the crisis here in Sri Lanka and would undermine the repayment capacity,” Peter Breuer, senior IMF mission chief told reporters in Colombo when asked what if China does not agree on a debt restructuring plan. The IMF team Saturday ended their a nine-day visit to finalize the staff-level agreement and a loan package for Sri Lanka’s reforms.

He said that China would not go along with Western creditors on debt restructuring on an equal footing. “So a deepening crisis means that essentially the resources available to service the debt would become less.”

All Sri Lankan creditors including China have to agree to restructure their existing loans to the island nation before the IMF starts disbursing a 2.9 billion US dollar loan on which preliminary agreement was announced on Thursday.

“So it is actually in the interest of all creditors to collaborate together and with Sri Lanka so that Sri Lanka can emerge from this crisis as quickly as possible and regain its repayment capacity and service this new debt that will come out of these debt negotiations,” Breuer stated.

Notably, 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, reported Sunday Island Online.

Earlier, China had dodged the request for debt relief. A spokesman for the Chinese embassy said that the ball is in Sri Lanka’s court, not China’s.

“We sent proposals to the Finance Ministry (of Sri Lanka) three months ago about our readiness to discuss how to address the debt issue with the Chinese banks. But, there was no response from them. Also, Sri Lanka insisted that it should complete the agreement with the International Monetary Fund (IMF) first. The ball is in Sri Lanka’s court,” the spokesman told Daily Mirror.

Sri Lanka has already hired financial and legal advisory firms Lazard and Clifford Chance LLP to support its debt restructuring as the country is on the brink of bankruptcy. Lazard has been the legal adviser in Zambia’s debt restructuring where creditors included China, reported Sunday Islands Online.

The Paris Club of Western nations has a well-defined unified process for dealing with defaulted nations, which is familiar to the IMF.

“Sri Lanka is in a special situation that much of its official debt is outside of Paris Club creditors,” Breuer said.

“It is important to move expeditiously. We want to avoid the crisis from becoming worse,” he added.

— report from Beijing News Net