China’s Reassurances on Sri Lanka Debt Remain Clouded by Uncertainty

Sri Lanka appeared to move a step closer to economic recovery this week, after China’s Export-Import Bank offered a two-year moratorium on the billions of dollars of debt the country owes to China. But it is unclear whether the moratorium is enough to assure other creditors that Beijing is on board with the broader multilateral restructuring of Sri Lanka’s debt – assurances that are needed before the International Monetary Fund (IMF) greenlights a US$2.9-billion bailout package to stabilize Sri Lanka’s economy. 

Back from the brink

In 2022, skyrocketing inflation, shortages of basic goods, and depleting foreign currency reserves plunged Sri Lanka into its worst economic crisis in 75 years. In April 2022, it defaulted on its debts; three months later, mass protests forced then-president Gotabaya Rajapaksa to flee, leaving prime minister Ranil Wickremesinghe (now acting president), to step into the breach. Wickremesinghe has secured the co-operation of Japan and India, two of Sri Lanka’s other large bilateral lenders, in a co-ordinated debt-restructuring effort. But China’s participation is paramount – the country holds nearly one-fifth of Sri Lanka’s external debt, estimated at around US$7.4 billion. Sources close to the negotiation process told Nikkei Asia that China’s commitments thus far have not been as far-reaching as hoped.

Getting Beijing on board

China is the world’s largest bilateral lender, with many of its loans going to countries that also now find themselves in economic distress. As such, observers are waiting to see if Beijing will go further in granting debt relief. In the past, China has been somewhat ambivalent toward broad, multi-stakeholder negotiations, preferring instead to take a case-by-case approach. On the one hand, China’s reservations are understandable: making exceptions for one country may encourage financial irresponsibility in other countries it has lent to. But on the other hand, if Sri Lanka agrees to a separate bilateral negotiation with Beijing, it could leave a bitter taste in the mouths of its other creditors whose goodwill it badly needs.