The Paris Club creditor states, which place equal burdens on the wealthy global north and the emerging global south, are proposing a ten-year moratorium on Sri Lanka’s debt and another 15 years of debt restructuring as a formula to resolve the island nation’s current financial crisis. While the Paris Club has yet to formally reach out to India and China, two of Sri Lanka’s biggest creditors with Beijing holding almost 50 percent of the foreign debt, Colombo, for its part, has yet to open a formal dialogue with the Xi regime and its prospects.
The scale of raising the $2.9 billion expanded fund approved by the IMF’s Executive Board this month ranges from very low to zero. This means that Sri Lanka will have to wait until the IMF meeting in March before any assistance is extended by the Bretton Woods institution. While Sri Lanka owes India around US$800 million in structured debt, the Modi government has provided the island nation with US$4 billion in emergency aid to address its economic crisis. China, China Exim and the China Development Bank hold billions in debt to Sri Lanka, bringing the island nation’s total external debt to nearly US$40 billion.
Sri Lanka’s public debt rose from 115.3 percent of GDP at the end of 2021 to 143.7 percent of GDP at the end of June 2022. During 2022, the debt increased further due to exchange rate depreciation, a deep recession and a fiscal deficit with no signs of an early recovery. Due to Rajapaksa’s misgovernance and the reckless implementation of white elephant projects on high-interest loans from China’s Exim and Development Bank, Sri Lanka is not only economically but also politically fragile, with local politicians largely discredited and the radical left standing in the way. due to the perceived corruption of the previous regime.
The fact is that for Sri Lanka to recover, creditors will have to take a haircut, with the Paris Club clearly suggesting that the Global South should also take a haircut as well as the Global North regardless of the unfair distribution of wealth. In the meantime, as Colombo still needs to act and initiate dialogue and debt reconciliation with China, it will need bridge financing to last the next three months before the IMF Executive Board meeting in March 2023. It is clear that things will get a lot worse for Sri Lanka before they get better – both economically and politically.
