Thursday, March 30, 2023

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China’s assurance for SL debt restructuring hangs on the IMF balance

China’s offer to Sri Lanka of a two-year moratorium on its debt is not acceptable as its in adequate and without haircut to enable Sri Lanka to receive the clear the path for the International Monetary Fund (IMF) board approval for US $2.9 billion Extended Fund Facility, informed sources said.

Sources said that the IMF requires more assurances from China in order to secure IMF board approval for the bailout package for Sri Lanka.

China’s Foreign Ministry had said this week that China’s Export-Import Bank of China (EXIM) has provided Sri Lanka with a debt extension.

EXIM has reportedly offered Sri Lanka a two-year moratorium on its debt and said it would support the country’s efforts to secure a $2.9 billion loan from the IMF.

However, informed sources noted that the IMF is not agreeable with the offer as it the two year moratorium is not sufficient and China letter has not mentioned any thing on the hair cut.

Meanwhile, the Paris Club is expected to make a key announcement with regards to the issue on Sri Lanka’s debt.

The Paris Club of creditor nations had last month said that it will suggest a 10-year moratorium for the country, together with another 15 years of debt restructuring, in order to save Sri Lanka from further economic and financial collapse.

India has already informed the IMF to clear the way for Sri Lanka to move forward. India’s External Affairs Minister Dr. S. Jaishankar had told reporters in Colombo that India has given the IMF financing assurances to clear the path for Sri Lanka.

There are a few Chinese financial institutions that have provided loans to Sri Lanka. Based on relevant studies and scholars who follow Chinese financial institutions, it is clear that these banks make their own decisions.

Sri Lanka has borrowed heavily from both China Exim and CDB, which operate in separate ways, so they cannot be expected to act in accordance with the debt restructuring negotiations.

Even within China Exim Bank, there are different departments that provide different kinds of lending. Therefore, a consensus within and between policy banks is required for China to formulate its approach to debt restructuring.

The complexities of debt restructuring don’t end there. Both China Exim and CDB lending are attached to activities of Chinese SOEs.

While the loans were provided by CDB and Exim, the benefits were received by the SOEs that implemented the projects. That is the basis of export credit lending:

A significant portion of the inputs for the projects are exported from China and the projects involve Chinese construction firms. This means, in the debt restructuring process, banks become the risk bearers while the SOEs have already gained the rewards.

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