(Reuters) – Sri Lanka, mired in its worst economic crisis in decades, is in debt restructuring talks with a range of bilateral creditors, including China, its largest single creditor.
The island nation of 22 million suffered its first foreign debt default in May 2022. In March, Sri Lanka secured a nearly $3 billion bailout from the International Monetary Fund that could help it emerge from the crisis.
China said this week that the Export-Import Bank of China had reached a preliminary deal with the country on the disposal of China-related debts, but did not share details.
WHAT HAS HAPPENED SO FAR
As part of the terms of the IMF bailout, Sri Lanka has to secure assurances of debt restructuring from bondholders and key bilateral lenders including China, Japan and India.
Sri Lanka has asked foreign investors for a 30% haircut to help restructure its debt and the negotiations, which kicked off in September last year, are still under way.
Under a domestic debt restructuring programme announced in June, Sri Lanka accepted offers to exchange about $10 billion worth of defaulted local debt for new bonds, the Finance Ministry said on Tuesday, taking it a step closer towards meeting debt restructuring requirements.
A total of 3.2 trillion rupees ($9.91 billion) of the 8.7 trillion rupees in bonds eligible for exchange were accepted, the Finance Ministry said in a statement.
The domestic restructuring is likely to set the stage for foreign debt renegotiation.
FIRST IMF REVIEW
Sri Lanka failed to reach an agreement with the IMF in its first review of the bailout package last month due to a potential shortfall in government revenue and the IMF delayed the release of the second tranche of $330 million.
SRI LANKA’S CREDITORS
According to data from the finance ministry, Sri Lanka’s external debt was $36.09 billion at the end of March this year. Once the debt restructuring is completed, Sri Lanka hopes to reduce its overall debt by $16.9 billion.
The country owed about $10 billion to multilateral banks like the World Bank and the Asian Development Bank (ADB) and $11.33 billion to bilateral creditors, including the Paris Club nations and China, Japan and India. Commercial loans, comprising of sovereign bonds and other time-bound loans, accounted for $14.75 billion.
Among bilateral creditors, Sri Lanka owed China $4.7 billion with debt to India standing at $1.74 billion. Japan, a part of the Paris Club group, was owed $2.68 billion. Sri Lanka has debt outstanding of $5.65 billion to the ADB and owed $3.88 billion to the World Bank.
The debt restructuring is also crucial for Sri Lanka to reach a 2.3% primary budget surplus by 2025, the key fiscal target set by the IMF.
(Compiled by Uditha Jayasinghe and Sudipto Ganguly; editing by Nick Macfie)
