China has taken the front seat in Sri Lanka’s external debt restructuring process making a calculated move akin to a chessboard strategy, catching everyone off-guard, by entering a preliminary debt deal with the Sri Lanka authorities.

Despite being Sri Lanka’s largest bilateral lender, China remained in shadows as Sri Lanka initiated negotiations with its creditors to restructure its debt, following a default on its foreign loans in April 2022.
Even when Japan, France and India announced a common platform for talks among Sri Lanka’s creditors to address the country’s debt restructuring programme, China only joined the official creditor committee as an observer.

However, this week, Chinese Foreign Ministry spokesperson announced that Export-Import Bank of China had entered into a preliminary debt treatment agreement with Sri Lanka.

Sri Lanka’s Finance Ministry confirmed this in a statement yesterday, calling it a “landmark agreement” that will help Sri Lanka to arrive at a deal with all its foreign creditors and clear the path for the approval of the first review of the International Monetary (IMF) Fund programme. 

The statement said Sri Lanka has “reached an agreement on the key principles and indicative terms of debt treatment with the Export-Import Bank of China (China Exim Bank).” The agreement covers approximately US$ 4.2 billion of outstanding debt.

“It constitutes a key step towards restoring Sri Lanka’s long-term debt sustainability and will pave the way to a prompt economic recovery,” the statement added.

However, it appears that the agreement between Sri Lanka and China has taken the country’s other foreign creditors entirely by surprise.

“A debt rework between Sri Lanka and countries including Japan, India and France was also expected this week, but news of the EXIM deal took them by surprise. The three nations request comparability of debt treatment with China,” a Reuters news report said.

The same report quoted French Finance Minister Bruno Le Maire telling journalists in Marrakech, Morocco, where the IMF Annual Meetings are currently taking place, that they were “on the verge of finding an agreement,”  

A senior Japanese official had also told Reuters that creditors were struggling to reach consensus and finding an agreement during this week’s IMF and World Bank meetings could be difficult.

“Members of the creditor committee need to see details of the China deal before finalising their proposal,” Reuters said quoting a source with direct knowledge of the talks, who asked not to be named.

Sri Lanka commenced negotiations with its creditors, including China, Japan, and India, in September of last year, in parallel to its efforts to secure the US$ 2.9 billion IMF bailout.

IMF Senior Mission Chief for Sri Lanka Peter Breuer also this week said IMF was not informed of any specifics of a debt restructuring deal between Sri Lanka and China.

Sri Lanka’s Finance Ministry hopes that “this landmark achievement will provide an anchor to their ongoing engagement with the Official Creditor Committee and commercial creditors, including the bondholders.” 
“It should also facilitate approval by the IMF Executive Board of the first review of the IMF-supported programme in the coming weeks, allowing for the next tranche of IMF financing of about US$ 334 million to be disbursed,” the Finance Ministry statement noted.

“In the next few weeks, the Sri Lankan authorities and China Exim bank will actively work on formalising and implementing the agreed parameters of the debt treatment,” it added.

According to the Finance Ministry, Sri Lanka’s total foreign debt as at end-March, 2023 was Rs.36.4 billion.

As per the IMF debt sustainability targets, Sri Lanka plans to reduce its overall debt by almost US$ 17 billion.  Sri Lanka is asking for 30 percent haircut from its foreign creditors.

Out of that, US$ 11.3 billion was bilateral debt and US$ 10.3 billion was multilateral debt owed to institutions like the World Bank and Asian Development Fund. Little over US$ 14.7 billion was commercial debt consisting mainly of sovereign bonds.

As at March-end 2023, Sri Lanka owed US$ 4.7 billion to China, US$ 1.74 billion to India, and US$ 2.68 billion to Japan, which is a member of the Paris Club. 

Additionally, Sri Lanka had outstanding debt of US$ 5.65 billion with the Asian Development Bank (ADB) and owed US$ 3.88 billion to the World Bank.