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Will IMF fund Sri Lanka after China’s opaque debt-restructuring deal with Colombo?

IMF caught by unaware as China signs debt restructuring deal with Sri Lanka

After much ado, China and Sri Lanka have finally reached an agreement towards debt restructuring of about $4.2 billion. While debt restructuring exercise has been a pre-condition, set by the International Monetary Fund (IMF) for Sri Lanka to secure the second tranche — $333 million of the total $3 billion bailout package, the finer details and conditionalities of the agreement have not been disclosed, something that the multilateral agency is not comfortable with.

“We will need to assess the entire package of agreements in its totality to assess consistency with IMF debt targets,” Peter Breuer, IMF’s Senior Mission Chief for Sri Lanka told news agency Reuters.

The IMF loan programme ran into trouble and has been put on hold since last month after the multilateral agency said it was not satisfied with Sri Lanka’s reform process.

China, Colombo’s largest bilateral creditor, has refused to join the committee of Sri Lanka’s official bilateral creditors which is being co-chaired by India, Japan and France. The committee comprises Paris Club members as well as other official bilateral creditors of the beleaguered island nation which officially defaulted last year. China, instead of joining the committee, has been engaging with Colombo directly.

The Diplomat noted that in 2022, Sri Lankans under unprecedented pressure were “hoping for some support from both India and China in the face of mounting economic and financial woes.”

“However, the magnitude of Indian financing – and the lack of anything in comparison from China – came as a significant surprise,” it said.

India came forth with a credit line of $4 billion to Sri Lanka. The credit line is scheduled to end in March 2024. Besides this, India has extended additional support and assistance as well. India has also provided food and medicines to the beleaguered nation.

In July Sri Lankan President Ranil Wickremesinghe visited India.

The Island, Sri Lankan newspaper, earlier noted that India has been extending unprecedented support to Sri Lanka in 2022. “India was also the first official bilateral creditor of Sri Lanka to convey written financing assurances to International Monetary Fund, which paved the way for the IMF package,” it said.

Sri Lanka, which is battling one of the worst crises in its history, owes more than $7 billion to bilateral creditors. Of this, it owes $3 billion to China. The country’s GDP contracted 3.1 per cent year-on-year in the second quarter of 2023, marking the sixth consecutive quarter of decline, as the country continues to battle a financial crisis, data portal Trading Economics said.

Also read: India set to launch two-hour ferry service to Sri Lanka as regional integration takes root