NEW DELHI: Sri Lanka‘s long-drawn-out debt crisis is showing no signs of easing. And the country responsible for prolonging the island nation’s woes is the one that triggered the crisis in the first place: China.
Sri Lanka has been trying hard to secure a concrete debt relief framework from China, its largest bilateral lender.
Due to this, it is unable to access the desperately needed cash under a $3 billion bailout from the International Monetary Fund (IMF).According to a report in Nikkei Asia, IMF officials denied Sri Lanka its second tranche of $330 million in aid after giving it a failing grade in the first review of the bailout. The reason was that Sri Lanka has been unable to restructure its external debt, most of which is owed to China.
While the IMF did not point fingers directly at China, multiple diplomatic sources told Nikkei Asia that “Beijing’s foot-dragging on Sri Lanka’s debt was an issue”.
China was the most recent bilateral creditor to join countries like Japan and India earlier this year in providing the initial financial assurances necessary to meet the IMF’s conditions for approving the March bailout.
It offered a two-year debt moratorium for Sri Lanka and discussed the possibility of extending new loans to manage existing debt.
However, the report said that China declined an invitation to participate in a committee of Sri Lanka’s bilateral creditors, which was chaired by Japan, India, and France.
This committee’s purpose was to develop an external debt restructuring framework. However, China chose to engage directly with the Sri Lankan government instead.

“The other lenders were OK with this arrangement and were prepared to let Colombo deal with Beijing at a bilateral level. But there cannot be any special deals favoring Chinese debt terms, such as no haircuts, yet expecting haircuts from the other countries,” the diplomat told Nikkei Asia.
Sri Lankan President Ranil Wickremesinghe has maintained that the country won’t engage in separate deals or give advantage to any one party.
‘No progress from China’
In May, an online meeting of Sri Lanka’s creditor nations saw the participation of 26 countries, with many of them being members of the Paris Club, a consortium of rich nations experienced in addressing external debt crises. China, however, attended as an observer only.
Among the countries within this group, diplomatic sources familiar with the discussions revealed that there has been no substantial advancement in terms of developing a concrete plan and timeline.
One source pointed out, “Nothing has moved concretely within the Japan-India-French creditor committee because of no progress from China.”
Consequently, there is keen interest in President Ranil’s upcoming visit to China, as it may provide new insights into the situation.
Two top Chinese lenders, Exim Bank and China Development Bank, account for over $7.3 billion of debt to Sri Lanka combined.
The loans do not appear to be “interest-free” either, the report said.
Moreover, China’s ambiguous response to Sri Lanka’s debt restructuring effort has raised questions about its motives.
“China appears to be taking a strategic approach rather than pursuing the Sri Lanka case from a financial position. It is trying to provide an extra level of protection to its major lenders – EXIM and CDB,” Manjuka Fernandopulle, a Sri Lankan commercial lawyer, told Nikkei Asia.
Debt woes
Sri Lanka has been grappling with a serious economic crisis over the last few years which triggered unprecedented street protests in 2022 driven by public anger.
Due to lack of cash to pay for even the most essential imports, the country witnessed shortages of food, fuel and medicines.
The nation’s worst economic crisis also forced then-president Gotabaya Rajapaksa to step down after months of protests over corruption and mismanagement.
In May 2022, Sri Lanka became the first Asian lower-middle income country to default on its sovereign debt this century.
Several observers and experts have said that China’s debt trap diplomacy may have fuelled the dire situation in Sri Lanka.
China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms has pushed several countries like Sri Lanka to the brink.
(With inputs from agencies)

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