Despite India’s unconditional and open-ended support for Sri Lanka based on an IMF-Paris Club debt sustainability analysis, China on Monday offered a two-year loan moratorium to its close ally for the years 2022 and 2023 to relieve Colombo’s short-term debt repayment pressure.
Mr. Zhang Wencai, Vice President of China’s Export and Import Bank, notified the Ranil Wickremesinghe administration in writing on Monday that the bank would grant a postponement on the debt service due in 2022 and 2023 as an immediate contingency based on the request from Colombo.
This means that during 2022 and 2023, Sri Lanka will not be required to repay the principal and interest on the Bank’s loan. The letter also stated that the bank would like to expedite negotiations with Colombo regarding medium- and long-term debt treatment during 2023, to finalize debt treatment in the coming months.
This essentially means that China’s support for the IMF’s extended fund facility of USD 2.9 billion to Sri Lanka over four years in eight six-month installments is conditional on the outcome of the two-year moratorium.
“The Bank will support Sri Lanka in its application for IMF EFF to help relieve the liquidity strain,” the Chinese Exim Bank Vice President stated in the letter. Meanwhile, adequate contributions from all creditors would be a critical condition for the parties’ desired speedy resolution. We will continue to urge commercial creditors (including international sovereign bondholders) to provide comparable debt treatment, and we will encourage multilateral creditors to do everything possible to make corresponding contributions.”
The letter continued, “Since you (Sri Lanka) announced the Interim Policy to suspend servicing of external public debt in mid-April 2022…the Bank has responded positively to your demand to rollover the principal and interest payable in 2022 and 2023.
Sri Lanka will receive the first tranche of EFF after the Bretton Woods Institution’s executive board meets in Washington later this month, with the Chinese EXIM bank supporting the IMF process. Following approval, Sri Lanka will be required to enter into a bilateral agreement with creditor nations within six months to ensure that the haircut on the loan taken is distributed evenly.
While Sri Lanka owes China USD 7.4 billion, it also owes India USD one billion in bilateral debt and another USD four billion given outside of bilateral debt during the two-year food, fuel, and medicine crisis in Sri Lanka.
According to the Chinese EXIM bank, it has financed a large number of road, port, airport, and power projects in Sri Lanka, nearly 40 of which have been completed.
The Chinese EXIM bank support for Sri Lanka was communicated to the IMF, who in turn informed Colombo, as the Ranil Wickremesinghe government was under tremendous pressure with foreign exchange reserves down to USD 500 million.
