March 30, 2023

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EXCLUSIVE: China promises Sri Lanka’s deal on debt remediation in the special letter for the coming months

COLOMBO (Reuters) – The Export-Import Bank of China has told Sri Lanka that it will try to finalize in the coming months how it will handle debt owed by the crisis-stricken country, according to a letter seen by Reuters and also reaffirmed. Postponing the payment of debts due in 2022 and 2023.

The International Monetary Fund said on Tuesday that Sri Lanka has secured financing guarantees from China, India and all its major bilateral creditors, paving the way for final approval of the IMF’s $2.9 billion four-year bailout on March 20.

Sri Lanka is facing its worst economic crisis in more than seven decades, and a shortage of dollars has disrupted imports of essentials, though the situation has improved this year compared to last year when protesters ousted its president.

In its letter to the Sri Lankan government on March 6, EXIM Bank wrote, China has extended its “unwavering support to Sri Lanka by addressing the debt”.

The bank’s vice president, Zhang Wencai, said in the letter that the island nation will not have to immediately repay principal and interest on its loans for two years, “to help ease the pressure of short-term debt repayment.”

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“In the meantime, we would like to speed up the negotiation process with your side on medium- and long-term debt remediation in this window period, with a view to finalizing the details of debt remediation in the coming months. We will do our best to contribute to the sustainability of Sri Lanka’s debt.”

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The letter mirrors what EXIM Bank sent to Sri Lanka in January, except with the goal of finalizing debt processing details in the coming months.

By the end of 2020, Sri Lanka’s debt amounted to $2.83 billion EXIM, or roughly 9% of the central government’s external debt, according to IMF data.

China will call on “commercial creditors to provide similar debt treatment, and encourage multilateral creditors to do their best to make contributions to help you better respond to and emerge from the crisis,” the letter added.

A Chinese Foreign Ministry spokesman confirmed the contents of the letter.

“It fully reflects our sincerity and efforts to support Sri Lanka in achieving debt sustainability, and we hope relevant parties can respond positively to Sri Lanka’s loan request as soon as possible,” Mao Ning said at a regular press conference.

Long talks with China

Sri Lanka’s international bonds fell on Wednesday with most issues down about 1 cent on the dollar, although that partially offset stellar gains in the previous session, Tradeweb data showed. And

Winning the backing of China, the world’s largest sovereign creditor, and Sri Lanka, was crucial for the IMF deal to move forward.

Sri Lankan President Ranil Wickremesinghe told parliament on Tuesday that the government received China’s letter on Monday evening and soon after, he and the central bank governor sent a letter of intent to the International Monetary Fund.

A source at Wickremesinghe’s office said the president was expecting the letter from EXIM Bank on Thursday.

“Sri Lanka has been talking, discussing and negotiating with EXIM Bank of China for weeks, almost always, because that’s what we’ve been assigned,” said the source, who declined to be identified because he is not authorized to speak to the media.

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He said the support of the international community, especially Japan and the United States’ talks with the Chinese government, has helped Sri Lanka. The source said Sri Lanka’s cause was also strengthened by the G20 meeting in India last month.

Sri Lankan Cabinet spokeswoman and Transport Minister Bandula Gunawardena told a weekly news conference that the possible final approval from the International Monetary Fund was a “great achievement”.

“Sri Lanka has worked hard and spent months to meet the requirements of the IMF programme, and at certain times the president has been involved on a personal level to get support,” he said.

Without the IMF programme, Sri Lanka cannot turn around its economy.

(Reporting by Devot Ghoshal and Uditha Jayasinghe) Additional reporting by Liz Lee in Beijing and Karen Stroecker in London. Written by Krishna N Das; Editing by Kim Coghill, Muralikumar Anantharaman and Sharon Singleton

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