Sri Lanka request India and China to reduce their debts

Key Takeaways:

• The Central Bank of Sri Lanka has asked India and China to reduce their debt as quickly as possible.
• The food price in Sri Lanka was 65% higher last month than it had been a year earlier, despite a slight decline in inflation since last year.
• According to reports, India is hesitant to accept debt restructuring terms worse than those made to China, a rival regional power.

The Central Bank of Sri Lanka has requested India and China to write down their loans as early as possible.

The economically distressed nation of the Indian Ocean missed debt payments and also agreed to a $2.9 billion (£2.4 billion) bailout.

However, the International Monetary Fund will not release the money until China and India agree to lower Sri Lanka’s billions of dollars in debt.

All parties should move quickly, according to the governor of Sri Lanka’s central bank, who spoke to BBC Newsnight.

“The sooner they give us finance assurances, the better for both [sides], as a creditor and debtor,” said P. Nandalal Weerasinghe.

He continued that will enable us to begin fulfilling our debts to them.

“We don’t want to stay in this situation for too long where we aren’t fulfilling our obligations. That is bad for the nation and us. That doesn’t bode well for Sri Lanka’s reputation among investors.”

Despite a slight decline in inflation since last year, the cost of food in Sri Lanka was 65% higher last month than a year earlier.

More than a 3rd of Sri Lanka’s population, or 8 million people, are living in “food insecurity,” with hunger especially common in rural areas.

Large-scale protests sparked by the economic unrest of the previous year resulted in the former president’s departure from the country in July.

The World Bank predicts that Sri Lanka’s economy will contract by 4.2% more this year after contracting by 9.2% in 2022.

Beijing owes India about $1 billion but has loaned about $7 billion to Sri Lanka.

The Sri Lankan government had hoped to agree on a new payment plan with China and India by the end of 2022.

A deal may be reached later in January, despite Mr Weerasinghe’s remark that “this all depends on some parties – our creditors truly have to make that decision.”

He went on to say that Sri Lanka had now provided all the information necessary for them to make an informed decision regarding the country’s borrowings.

According to independent analysts, China is concerned about the possible ramifications of a significant write-down of Sri Lanka’s debt on its extensive lending to other developing nations through its Belt as well as Road programme.

India is reportedly reluctant to agree to debt restructuring terms that are bad than those offered to China, a regional rival nation.

Julie Chung, the US ambassador to Sri Lanka, claimed that China, the largest bilateral lender, had a greater responsibility to act.

“Because Sri Lanka doesn’t have time to wait, we hope they don’t. They require these guarantees right away, “Chung, the ambassador, told BBC Newsnight.

“We certainly assume China is not a spoiler as they move forward to achieve this IMF agreement for the sake of the Sri Lankan people.”

However, if India and China ultimately decide to write down their loans to the country, private creditors, who account for 40% of Sri Lanka’s external debt stock, could become an issue.

Following Argentina’s economic collapse and also default in 2001, some American hedge funds sued the Argentine government in US courts to demand full repayment of the sovereign debt they had bought on the open market rather than agreeing to a restructuring.

In a letter dated January 8 that stated that all of Sri Lanka’s creditors “must ensure debt cancellation sufficient to offer a way out of the current crisis,” a sizable group of international economists called for the “cancellation” of Sri Lanka’s bonds.

When asked about the private bondholders in Sri Lanka, Mr Weerasinghe responded: “We negotiate in good faith with private creditors. And from what we can tell, they are open to interacting with us and are very positive.”

The governor stated that he anticipated that the IMF funds might be distributed to Sri Lanka in “four to six weeks” following agreement from bilateral creditors.