Sri Lanka reaches preliminary debt restructuring deal with China’s Exim Bank

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Sri Lanka said it has reached a preliminary debt restructuring agreement with the Export-Import Bank of China, a crucial step towards securing the next tranche of IMF funds to help the country recover from a financial meltdown.

China is the largest bilateral creditor to Sri Lanka, which last year became the first Asia-Pacific country in two decades to default on foreign debt of $41bn amid a severe economic crisis.

The agreement with Exim Bank covers about $4.2bn of the country’s debt and is the largest single portion of what it owes to Chinese lenders, according to IMF data.

The announcement, which did not outline any details about the restructuring, “will pave the way to a prompt economic recovery”, Sri Lanka’s finance ministry said. “The indicative terms agreed will provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda.”

K M Mahinda Siriwardana, secretary to the Treasury, said in a statement that the agreement “constitutes a key milestone in Sri Lanka’s ongoing efforts to foster its economic recovery” and praised Exim Bank “for the support in resolving our country’s debt situation”.

China’s foreign ministry said on Tuesday that Exim Bank and Sri Lanka had reached the tentative deal late last month. The deal is the largest breakthrough in Sri Lanka’s efforts to renegotiate debts with its creditors, which include countries such as India and Japan as well as commercial bondholders.

Sri Lanka officials have travelled to Marrakech for the IMF’s annual meetings this week, and the announcement of the agreement with Exim Bank will increase pressure on the country’s outstanding creditors to strike a deal.

Negotiations have been complicated by a split among the lenders. While Sri Lanka’s non-Chinese bilateral creditors formed a committee, Beijing has negotiated separately.

Sri Lanka’s talks with China have been closely watched by global policymakers and bondholders as a signal of how Beijing, whose importance as a creditor to developing countries has soared over the past decade, will respond to debt crises.

Restructuring its debt is a condition of Sri Lanka unlocking the next $333mn tranche of a $3bn lending programme agreed with the IMF this year. The programme has been on hold since last month after the fund and Sri Lanka failed to agree on terms for the next disbursement.

The IMF said at the time that Colombo had fallen short on some reform initiatives, such as steps to improve tax and revenue collection.

The country of 22mn continues to reel from last year’s economic implosion, when a severe shortage of foreign reserves left it unable to import vital goods such as fuel, medicine and even food.

The ensuing mass protests toppled the government of Gotabaya Rajapaksa, who briefly fled the country. His successor, Ranil Wickremesinghe, is unpopular but has vowed to return Sri Lanka to normalcy.