Debt Trap: Hoping For Relief, Sri Lanka Pushing For A Deal With China

A $3 billion four-year lending programme has been approved by the International Monetary Fund (IMF) for Sri Lanka.

Following the IMF's approval, Sri Lanka President Ranil Wickremesinghe stated that the deal and his long-term reform plans represent the island nation's final opportunity to alleviate the crippling shortages of food, fuel, medicine, and foreign currency that have plagued the economy in 2022.

Sri Lanka's President aims to see negotiated agreements with its creditors by year-end. However, he acknowledged, in a rare media interaction, that achieving this may be improbable considering the difference between his goals and the reality.

Wickremesinghe stated that both sides cannot be rigid, and compromise is necessary, amidst a lot of shadowboxing.

Last year, Sri Lanka represented economic instability due to shortages of products, increasing hunger, and political disharmony.

The way its creditors react to its negotiations serves as a gauge of how lenders handle the mounting global debt crisis, with Beijing's involvement attracting significant worldwide attention.

Sri Lanka will receive $330 million from the IMF, but the remaining funds are dependent on their progress towards a debt restructuring agreement.

Sri Lanka's progress in reaching a deal is affected by factors beyond Colombo's control. Improvement in tensions between China and other creditors, the main bilateral lender, is crucial for moving forward.

IMF's deal gained approval after Beijing's resistance to restructuring was dropped, though initially proposed in September.

Ghana and Pakistan are monitoring Sri Lanka's debt negotiations with China, as they also owe significant amounts.

Sri Lanka's foreign debt to China, India, and Japan, as well as commercial bondholders, is approximately $40 billion, with an additional $40 billion in domestic debt, according to IMF data.

Wickremesinghe expressed that the main concern is if their bilateral creditors will communicate on one platform, or if they will have separate conversations with China and the Paris Club members, which consist of Japan and various western European nations.

Despite tensions over the size of a potential writedown, he expects the Chinese to agree to a debt deal.

As a top lender to developing economies in the past decade, Beijing has taken a different approach in dealing with debtor nations affected by the emerging debt crisis.

Zambia has been hesitant to adopt the approach to debt restructuring suggested by western lenders, stating that current global norms must be revised, resulting in criticism from the US and others who claim that it has impeded the recovery of countries like Zambia from debt crises.

In 2020, Sri Lanka was the first Asia-Pacific country to default on its debt in 20 years.

Sri Lanka's foreign currency shortages caused by global inflation and economic mismanagement led to mass protests, causing the former president to flee.

Amid the turmoil in the country, some blamed the then-prime minister, Wickremesinghe, for the crisis and even set his house on fire, destroying his collection of books and antiques, as he lamented.

Wickremesinghe's Presidency has led to tax increases as part of commitments to the IMF.

The IMF programme's completion may pose difficulties as analysts deem politically sensitive reforms, such as privatizing state-controlled assets like hotels, airlines, and telecoms to be necessary.

Wickremesinghe suggested government withdraw from business, with the exception of financial sectors.