SL’s major bilateral creditors launch debt restructuring talks

Sri Lanka and major creditors formally launched talks to restructure the nation’s debt without China – its biggest bilateral lender – a sign of growing frustration with Beijing’s approach to debt woes in the developing world, Bloomberg reported.

Finance chiefs from India, Japan and the Paris Club of sovereign creditors held a joint briefing Thursday evening in Washington with the International Monetary Fund to mark the start of the restructuring.

The event was aimed at injecting new momentum into Sri Lankan debt talks caught in a standoff between China and other lenders over how best to deal with the island nation’s debt problems, people familiar with the matter said. They declined to be identified because the talks are private.

“Sri Lanka remains in a deep debt crisis and expeditious debt resolution is fast needed for Sri Lanka to emerge as quickly as possible from its crisis,” IMF Deputy Managing Director Kenji Okamura said. “We hope all official bilateral creditors can participate and the negotiations can progress swiftly.”

Other officials in the briefing also called for all creditors to participate, without mentioning China by name. Okamura added that they aim to complete the debt reworking by the first review of the nation’s IMF program. The review is expected around September, based on fund norms.

The launch of the talks comes a day after China agreed to soften some of its demands during a roundtable convened by the IMF and World Bank to hammer out broader guidelines for providing debt relief to low-income countries. Those discussions are due to continue in the months ahead, with significant issues still unresolved.

Hanging over those wider talks have been concerns about China’s role in negotiations involving countries like Sri Lanka and Zambia, which are facing increasing economic strains because of slow progress in resolving their debt issues.

Both Sri Lanka and its creditors have said they would like China to participate in restructuring discussions. But people familiar with the talks said they are also eager not to let Beijing hold up negotiations any further.

One person familiar with the matter said Sri Lanka had committed not to negotiate a separate debt deal with China, which has been a concern for other creditors. Thursday’s move was also intended to make sure that Beijing did not have any leadership role in the creditor committee’s guiding talks, they said.

Finance Minister Shunichi Suzuki said Thursday that China had been invited to the talks but had not responded over its participation. Sri Lanka’s junior finance minister also said all creditors had been invited to join the new initiative. The Chinese Embassy in Washington didn’t immediately respond to a request for comment.

Suzuki said the framework for the Sri Lanka talks had been negotiated by Japan, India and France as the traditional representatives of the Paris Club of rich creditor countries. He said he hoped the Sri Lanka talks would become a model for negotiations with other nations.

 “We want China to participate in talks very much,” Suzuki told reporters. “China is a large creditor. The talks should take place on an equal footing with decisions made after negotiations using transparent debt data.”

Suzuki said the previous day that it would be unfair if some nation held bilateral talks and secured benefits before others.

The Chinese Embassy in Colombo said in separate tweets that in meetings in Washington Chinese officials had said they were still committed to helping Sri Lanka address its debt issues, though they didn’t say the country would join the new push.

Sri Lanka Central Bank Governor Nandalal Weerasinghe called for an early resolution of the restructuring talks.

 “It’s in the best interest for China and Sri Lanka both to complete this process soon and we can get back to repaying our distressed obligation,” Weerasinghe said in an interview. “We have to make sure that we do it as soon as possible.”

Paris Club members including Japan account for $ 4.8 billion, or more than 10% of Sri Lanka’s external debt, according to IMF data. That’s slightly higher than China, which stands at $ 4.5 billion, while India is owed $ 1.8 billion.

 “Given the relationship between Japan, India, the Paris Club and China – and that none of them have as much skin in the game – the chances that China would join a group led by them was somewhere between slim and none,” said David Loevinger, a sovereign analyst at TCW Group and former US Treasury Department senior coordinator for China affairs. Beijing “is unlikely to take diktats from smaller creditors,” he said, adding that it “will likely go its own way in dealing with Sri Lanka.”

The IMF approved a $ 3 billion four-year bailout for Sri Lanka on 20 March and has urged a speedy resolution of debt-restructuring talks.

Emerging-market debt distress, and cooperation among creditors, has been a key theme at this week’s IMF and World Bank meetings in Washington. Much of the focus has been on the role of China, which in recent years has become the world’s top sovereign creditor.

The rescue efforts for Sri Lanka have been a test case of China’s willingness to work with other creditors in providing debt relief.

In February, Paris Club creditors, as well as Hungary and Saudi Arabia, called on China to join the international effort to provide debt relief to Sri Lanka. The appeal for financial backing from the world’s second-biggest economy came amid fears that China’s unilateral positioning might delay and even complicate the rescue of Sri Lanka just like what happened in Zambia.

The rift between Beijing and the Paris Club as well as multilateral institutions has delayed efforts to ease debt burdens on developing economies struggling to recover from the pandemic and repay loans even as a stronger dollar and higher interest rates increase debt servicing costs. China has said it wants multilateral lenders to also provide debt relief.

Sri Lanka last month took a key step toward winning the cooperation of its external bondholders for restructuring $ 84 billion in debt by agreeing to include local-currency bonds in the program.

The exercise, which will include the shorter-term treasury bills held by the nation’s Central Bank and also some longer-term treasury bonds, on a voluntary basis, is intended to reduce the burden on foreign commercial creditors.