Sri Lanka: China offers debt moratorium

The Export-Import Bank of China has offered Sri Lanka a two-year moratorium on its debt and said it will support the country's efforts to secure a US$2.9 billion loan from the International Monetary Fund (IMF), according to a Reuters report.

India wrote to the IMF earlier this month, saying it would commit to supporting Sri Lanka with financing and debt relief, but the island nation also needs the backing of China in order to reach a final agreement with the global lender.

China's January 19, 2023 letter sent to the finance ministry may not be enough for Sri Lanka to immediately gain the IMF's approval for the critical loan, a Sri Lankan source with knowledge of the matter said.

Regional rivals China and India are the biggest bilateral lenders to Sri Lanka, a country of 22 million people that is facing its worst economic crisis in seven decades.

According to the letter, the Export-Import Bank of China said it was going to provide an extension on the debt service due in 2022 and 2023 as an immediate contingency measure based on Sri Lanka's request.

At the end of 2020, China EXIM bank had loaned Sri Lanka US$2.83 billion which is 3.5% of the island's debt, according to an IMF report released in March 2022.

"...you will not have to repay the principal and interest due of the bank's loans during the above-mentioned period," the letter said.

"Meanwhile, we would like to expedite the negotiation process with your side regarding medium and long-term debt treatment in this window period."

Sri Lanka owed Chinese lenders US$7.4 billion, or nearly a fifth of its public external debt, by the end of last year, calculations by the China Africa Research Initiative showed.

"The bank will support Sri Lanka in your application for the IMF Extended Fund Facility (EFF) to help relieve the liquidity strain," the letter said.

The Sri Lankan source, who asked not to be identified because of the sensitivity of the confidential discussions, said the island nation had hoped for a clear assurance from Beijing on the lines of what India provided to the IMF.

"China was expected to do more," the source said, "This is much less than what is required and expected of them."

Sri Lanka's central bank chief P. Nandalal Weerasinghe said on Tuesday that the country hoped for assurances from China and Japan, another major bilateral lender, soon and complete debt restructuring in six months.