HomeEconomyIndia decide to support the IMF's debt sustainability analysis of Sri Lanka...

India decide to support the IMF’s debt sustainability analysis of Sri Lanka with 10 year debt moratorium

Sri Lanka and Pakistan have been the poster boys for China’s Belt Road Initiative (BRI) for the past decade, using high-interest loans from Beijing to create white elephant projects. Both nations are in decline today because China is not showing the same enthusiasm as the BRI in reviving their economies with much-needed aid to overcome the growing food and fuel crisis.

These two countries are scraping the bottom of the economic barrel with a very weak US dollar exchange rate, high inflation and very high bank interest rates. The economic crisis in these two countries is a lesson for Nepal, Bangladesh, the Maldives and Myanmar, whose political leadership has often landed at Beijing’s door for infrastructure funding, while the Chinese Communist Party has been able to penetrate the Indian subcontinent’s bureaucracy on their soil advantage.

Export-Import Bank of India announce debt relief to Sri Lanka

While the Export-Import Bank of India has announced in writing that its financing and debt relief to Sri Lanka will be in line with the IMF and the Paris Club, the Export-Import Bank of China has made it clear to Colombo that it will only provide a moratorium on repayments for only two years instead of a ten-year moratorium , as recommended by the IMF-Paris Club. The IMF and the Paris Club recommended that Sri Lanka’s debt restructuring should take 15 years.

This means that the IMF’s US$2.9 billion package (spread over four years with six monthly reviews) to Sri Lanka in March is at risk due to China’s EXIM Bank conditions. The only other option is for the IMF to authorize sovereign arrears borrowing to save Sri Lanka from full-blown economic and political chaos.

Sri Lanka owes China at least US$7 billion in debt, including loans from the China Development Bank, with figures rising further when private debt is included. The unsustainable high-interest debt is caused by financial fraud and mismanagement by the Rajapaksa regime, of which current President Ranil Wickremesinghe was an important part in the past.

Thanks to the Rajapaksa’s financial profligacy, high-interest Chinese money was used to build unsustainable white elephant projects across the country, including the Hambantota Port, the Mattala Rajapaksa International Airport and the Norocholai Power Plant. The public resentment that spilled over against the Rajapaksa in 2022 allowed the rise of far-left political parties in the island nation. Basically, as in Pakistan, the political antidote is worse than economic malaise.

In its letter to IMF Managing Director Kristalina Georgieva dated 16 January 2023, India made it clear that it would fully support the IMF and Paris Club debt sustainability analysis without any further conditions. However, the Modi government has made it clear that the Sri Lankan authorities should seek fair debt treatment from all commercial creditors and other official bilateral creditors, as well as adequate financial contributions from multilateral development banks. A copy of India’s IMF letter was also sent to Sri Lanka’s Ministry of Finance.

India’s letter committed to continue negotiations with the Sri Lankan government along with the Paris Club on medium to long-term debt through maturity extension and interest rate reduction or any other financial operations that would bring about similar financing/debt relief.

India’s understanding of the IMF’s debt sustainability assessment is that it will be supported by program targets to reduce Sri Lanka’s public debt-to-GDP ratio below 95 percent by 2032 and the central government’s annual gross financial needs to be below 13 percent of GDP on average in 2027-2032. In addition, the central government’s annual foreign currency debt service should be below 4.5 percent of GDP each year in 2027-32 to close Sri Lanka’s external financing gap.

Written by: Vaishali Verma

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