Sri Lanka and China Reach Initial Accord Regarding Debt Relief

14 Oct, 2023

Sri Lanka and China Reach Initial Accord Regarding Debt Relief

Sri Lanka has taken a significant step towards managing its debt as it reaches a preliminary agreement with China's EXIM bank on the treatment of its outstanding financial obligations. The Sri Lankan Finance Ministry issued a statement on Wednesday, October 11, confirming the accord, which encompasses approximately $4.2 billion of unpaid debt.

This preliminary agreement represents a pivotal move in the direction of reinstating Sri Lanka's long-term debt sustainability and, more importantly, opening the door to a swift economic recovery, as stated in the ministry's announcement.

The terms laid out in the agreement are seen as essential for Sri Lanka to create the necessary fiscal leeway to execute its ambitious reform agenda, according to the same statement. Sri Lanka is optimistic that this milestone will strengthen its ongoing interactions with the Official Creditor Committee and commercial creditors, including bondholders.

The ministry's statement also highlighted that this agreement could smooth the way for the International Monetary Fund (IMF) Executive Board's approval of the first review of the IMF-supported program in the weeks to come. This approval would clear the path for the disbursement of approximately US$334 million, the next tranche of IMF financing.

This debt treatment agreement arrives on the eve of President Ranil Wickremesinghe's upcoming visit to China, scheduled for next week. President Wickremesinghe has been at the forefront of Sri Lanka's efforts to manage its substantial debt and ensure the continuous flow of funds from a $2.9 billion IMF program.

During his visit, President Wickremesinghe is expected to hold discussions with Chinese President Xi Jinping and is likely to meet China's finance and foreign ministers, as reported by Reuters, citing a credible source. These talks are expected to reinforce the relationship between the two nations in the context of debt management and economic cooperation.

Sri Lanka had encountered a challenging situation last year when it defaulted on its foreign debt in May. This default was prompted by a sharp decline in the country's dollar reserves, which left Sri Lanka unable to cover essential imports, such as fuel and medicine. The recent agreement with China's EXIM bank marks a significant step towards addressing these financial challenges and restoring economic stability.