Sri Lanka IMF Deal Stalls Amid China-World Bank Relief Split

(Bloomberg) -- China said it wanted multilateral lenders to provide debt relief to Sri Lanka as part of a broader restructuring of loans, a demand at odds with other major creditors and likely to slow a pact to unlock International Monetary Fund aid.

China has offered debt extensions for the island nation and calls “on all other creditors of Sri Lanka, especially multilateral creditors, to take synchronized, similar steps,” Mao Ning, a foreign ministry spokeswoman, said in a briefing Friday.

The comments Friday on Sri Lanka echo similar issues around debt negotiations with Zambia, where China is also a major creditor. Biejing’s insistence that multilateral lenders, like the World Bank, restructure their loans to countries struggling to repay is at odds with the usual Paris Club practice. 

The split between Beijing and other lenders — such Paris Club nations including the US an Japan, as well as international organizations such as IMF and World Bank — has delayed efforts to ease debt burdens on developing economies struggling to recover from the pandemic and repay loans amid a stronger US dollar. 

Chinese lending accounted for almost 20% of Sri Lanka’s public foreign debt in May 2022, according research by the School of Advanced International Studies at Johns Hopkins University, while the World Bank and Asia Development Bank held 10% and 15% shares respectively.

The statement from China came after the Paris Club of creditors joined India in formally supporting debt restructuring for Sri Lanka, bolstering the bankrupt nation’s efforts to unlock a $2.9 billion bailout from the IMF.

The IMF received the assurance from the Paris Club — comprising mostly rich, western bilateral creditors — in recent days, according to people familiar with the discussions. The Paris Club includes Japan, which held 8% of Sri Lanka’s external debt last year, according to the Johns Hopkins research.

That leaves China — in particular its state-owned Export-Import Bank, or Exim — as an obstacle to a restructuring deal. China called for private creditors to provide debt treatment in a comparable manner to sovereign lenders and for “multilateral creditors to do their utmost to make corresponding contributions,” Mao added.

Debt negotiations have dragged on since Sri Lanka defaulted in May, with creditors bickering on the size of losses they are willing to accept and whether local debt should be included in the restructuring. Without Beijing’s formal assurance of support to the debt recast, Sri Lanka’s path to getting the IMF lending remains uncertain. 

Exim has provided an extension on Sri Lanka’s debt service due in 2022 and 2023, and will not require it to repay the principle or interest during that time, Mao said. The bank also “would like to have friendly consultation with Sri Lanka regarding medium- and long-term debt treatment in this window period,” she said.

“China also calls on the IMF to take into full consideration the urgency of the situation in Sri Lanka and provide loan support as soon as possible to relieve the country’s liquidity strain,” Mao said.

Separately, a group of Sri Lanka’s dollar bondholders on Friday said it has written to the IMF expressing their willingness to engage in debt restructuring talks.

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