China says it will discuss Sri Lanka debt re-structuring during two-year moratorium

China’s Exim Bank has given Sri Lanka a two-year moratorium on its defaulted loans and will discuss additional re-structuring within the ‘window’ Foreign Ministry spokesperson Mao Ning has said.

The Export-Import Bank of China has sent a letter to Sri Lanka on January 19 saying installments including interest due in 2022 and 2023 would not have to be repaid.

“..[M]eanwhile, the Bank would like to have friendly consultation with Sri Lanka regarding medium- and long-term debt treatment in this window period,” she said.

“And the Bank will make best efforts to contribute to the debt sustainability of Sri Lanka. The Bank also noted that it will support Sri Lanka in its loan application to the IMF.”

The International Monetary Fund has so far not said the letter is in conformity for them to give a 2.9 billion US dollar loan to Sri Lanka and unlock loans from the World Bank, Asian Development Bank, Japan and others.

Bi-lateral creditors are not at this stage expected to give assurances setting pre-conditions such as a two-year grace period, but offer to re-structure debt in line with a financing envelop of the IMF program, according to those familiar with the process.

Based on leaked letter from India, creditors have to agree to limit repayments so that total foreign repayments and new financing does not exceed 4.5 percent of GDP from 2027 and the total including domestic does not exceed 13.5 percent.

It is not clear what the grace period would be to require a 4.5 percent ceiling or the GFN ceiling in the intervening period but the current level has topped 30 percent of GDP.

Bi-lateral creditors have to agree to re-structure the debt using a combination of grace, maturity extensions and or coupon changes to achieve the financing targets.

The exact details are worked out in a second stage after an IMF program is approved by the board.

Talks with private creditors commence after that and have to be wrapped up as fast as possible.

It is not clear whether as much as two years could be given to a bilateral lender to negotiate its debt.

China has also given loans to Sri Lanka through China Development Bank and it is not clear whether a letter from only the Exim Bank is sufficient or a letter covering all non-commercial loans are required.

The Exim Bank has financed Sri Lanka’s coal power plant, which the country’s auditor general has said is the higher return project implemented in the country since the hydro-electric dams of the 1980s. Even now the country’s economy is kept afloat by the coal plant.

Sri Lanka defaulted on its foreign debt in 2022 after suffering serial currency crises from 2015 under so-called flexible inflation targeting, despite operating a reserve collecting peg.

Under flexible policies money was printed to target inflation as high as 5 percent (about 250-pct of the level of stable countries) and for stimulus, bombarding the credit system with aggressive open market operations to mis-target interest rates until forex shortages emerge and the currency collapses repeatedly.

The country borrowed heavily from sovereign bond holders and also China as monetary instability during times of forex shortages rapidly ratcheting up foreign debt.

Market access countries as the US tightens monetary policy and and the countries recover from a Coronavirus crisis and monetary policy corrections are fatally delayed by high inflation targets, critics say.

The full statement of the spokesperson is re-produced below:

Mao Ning: On January 19, the Export-Import Bank of China, as the official bilateral creditor, provided a financing support document to the Ministry of Finance, Economic Stabilization and National Policies of Sri Lanka, saying the Bank is going to provide an extension on the debt service due in 2022 and 2023, which means Sri Lanka will not have to repay the principal and interest due of the Bank’s loans during the above-mentioned period, so as to help relieve Sri Lanka’s short-term debt repayment pressure; meanwhile, the Bank would like to have friendly consultation with Sri Lanka regarding medium- and long-term debt treatment in this window period; and the Bank will make best efforts to contribute to the debt sustainability of Sri Lanka.

The Bank also noted that it will support Sri Lanka in its loan application to the IMF; in the meantime, the Bank will continuously call on commercial creditors (including the International Sovereign Bondholders) to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make corresponding contributions.

As we have said several times, as a friendly neighbor and true friend, China has been providing assistance for Sri Lanka’s economic and social development to the best of our capabilities. The financing support document is aimed at combining an “immediate contingency measure” and “medium- and long-term debt treatment” to rapidly, effectively and truly resolve Sri Lanka’s debt issue. As far as I have learned, China is the first official bilateral creditor to have taken the initiative to announce debt extension to Sri Lanka. This speaks to China’s sincerity and action to support Sri Lanka’s effort to achieve debt sustainability.

China calls on all other creditors of Sri Lanka, especially multilateral creditors, to take synchronized, similar steps and give effective, strong support to Sri Lanka to help the country emerge from its default status at an early date and eventually work out an arrangement for Sri Lanka to achieve medium- and long-term debt sustainability. China also calls on the IMF to take into full consideration the urgency of the situation in Sri Lanka and provide loan support as soon as possible to relieve the country’s liquidity strain.

Going forward, China will continue to support relevant financial institutions in actively working out the debt treatment. We will work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.

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