Economic crisis-hit Sri Lanka's central bank urges India, China to reduce debts at earliest

Colombo: Economic crisis-hit Sri Lanka has urged India and China to agree a write-down of their loans to help them to start “repaying their obligations”.

The island nation, which has been for the past several months facing one of its worst economic crisis since its independence in 1947, defaulted on its debt repayments. It has now negotiated a $2.9 billion bailout.

But the International Monetary Fund (IMF) will not be releasing funds till the time India and China agree to reduce Lanka’s debt.

Sri Lanka’s central bank governor P Nandalal Weerasinghe told BBC Newsnight that the “sooner” India and China give it finance assurances that “would be better for both (sides), as a creditor, as a debtor. That will help us to start repaying their obligations.”

“We don’t want to be in this kind of situation, not meeting the obligations, for too long. That is not good for the country and for us. That’s not good for investor confidence in Sri Lanka,” he added.

Lending to Sri Lanka

India is owed by Sri Lanka around $1 billion, while China’s lending to the island nation stands at around $7 billion.

Initially the Sri Lankan government had hoped to agree a new payment plan with China and India by the end of 2022.

Sri Lanka is optimistic

Weerasinghe feels that there is a possibility that an agreement could come later this month (January, 2023), but added that “this all depends on the other parties — our creditors really have to make that decision”.

“Sri Lanka had now provided them with all the information on the country’s borrowings they needed,” the Sri Lanka’s central bank governor said.

The US ambassador to Sri Lanka, Julie Chung told BBC Newsnight that between the two countries, the greatest onus to move was on China as it being the biggest bilateral lender.

“We hope that they do not delay because Sri Lanka does not have time to delay. They need these assurances immediately,” Chung said.

Will Sri Lanka’s problem solve?

If India and China ultimately agree to write down their loans to Sri Lanka, there may be another problem that may loom in the form of private creditors, who account for 40 per cent of the country’s external debt stock.

A group of international economists, earlier this month, called for Sri Lanka’s bonds to be “cancelled”, writing: “All of Sri Lanka’s creditors must ensure debt cancellation sufficient to provide a way out of the current crisis.”

Talking about Sri Lanka’s private bondholders, Weerasinghe said: “We engage with private creditors in good faith negotiations. And what we are seeing is that they are very positive and they are willing to engage with us.”

The governor said he expected the IMF funds to be distributed to Sri Lanka within “four to six weeks” once agreement from bilateral creditors has been agreed.

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