ECONOMYNEXT – A committee of Sri Lanka’s official bilateral creditors in which China is not a formal member has said relief will be provided, after the South Asian island made a formal request for debt restructuring, at a virtual meeting.
“The creditor committee for Sri Lanka will pursue its work to find an appropriate solution to Sri Lanka’s external debt vulnerabilities, consistent with the parameters of the IMF program,” a statement issued after the meeting said.
“It stresses the importance for private creditors and other official bilateral creditors of Sri Lanka to provide a debt treatment on terms at least as favorable as the ones agreed by this creditor committee, in line with the comparability of treatment principle.
“It reiterates its invitation to other bilateral official creditors to formally join the creditor committee.
Related Sri Lanka to negotiate with Paris Club and China separately: PresidentThe creditor committee is co-chaired by Japan and France of the Paris Club and India. China, Saudi Arabia and Iran had attended as observers.
Sri Lanka has said the country will work with China separately. (Sri Lanka to negotiate with Paris Club and China separately: President)
“The Sri Lankan authorities attended the meeting and formally presented their request for a debt treatment,” the statement said.
“They reiterated their commitment to transparency and comparability of treatment towards their official bilateral creditors.
“The IMF and World Bank representatives presented the latest macroeconomic developments regarding Sri Lanka and the current status of their relationship with the country.”
Sri Lanka is expecting debt relief of 16.8 billion US dollars from external lenders based on earlier statements.
Relief can be provided by principal haircuts (usually private creditors), grace periods, extensions of maturity or coupon reductions.
Sri Lanka defaulted on its debt after loading in April 2022 after a particularly severe bout of monetary instability from suppressed interest rates as well as tax cuts made for stimulus or output gap targeting.
Several countries in Africa, Latin America and South Asia, with a record of monetary instability are in the same boat in the new wave, probably the biggest since external sovereign debt defaults cropped in the 1980s, following excesses in the 1970s.
Pakistan is teetering on the edge.
Sri Lanka loaded up on international sovereign bonds and also some Chinese budget support loans as monetary instability worsened and persistent forex shortages emerged under flexible inflation targeting over the past decade, when dollar loans were also cheap due to US money printing.
By end 2022, Sri Lanka had 36.37 billion US dollars of central government external debt and 1.647 billion dollars of sovereign guaranteed debt in state enterprises.
The central bank had also borrowed 3.0 billion US dollars in recent periods of monetary instability, taking the total external debt to 41.47 billion US dollars.
A part of the debt, including late stage loans given by India during the last bout of monetary instability is excluded from re-structuring.
PERIMETER: The debt stocks over which relief is expected
The full statement by the official creditor committee is reproduced below:
On May 9th, 2023, 17 countries have formally formed an official creditor committee, co-chaired by India, Japan and France, to discuss the Sri Lankan authorities’ request for a debt treatment. The committee includes Paris Club creditors as well as other official bilateral creditors. This first meeting occurred after the successful launch of the debt restructuring process for Sri Lanka led by the co-chairs on April 13th, 2023.
The Sri Lankan authorities attended the meeting and formally presented their request for a debt treatment. They reiterated their commitment to transparency and comparability of treatment towards their official bilateral creditors. The IMF and World Bank representatives presented the latest macroeconomic developments regarding Sri Lanka and the current status of their relationship with the country.
The creditor committee takes note of the open letter addressed by the President of Sri Lanka to all its official bilateral creditors on March 14, 2023 assuring transparency and comparability of treatment for all external creditors and ensuring that no side arrangements inconsistent with comparability of treatment will be made with any creditor. The committee welcomes passage of the resolution for implementation of the IMF-supported programme by the Sri Lankan Parliament on April 28, 2023.
The creditor committee for Sri Lanka will pursue its work to find an appropriate solution to Sri Lanka’s external debt vulnerabilities, consistent with the parameters of the IMF program. It stresses the importance for private creditors and other official bilateral creditors of Sri Lanka to provide a debt treatment on terms at least as favorable as the ones agreed by this creditor committee, in line with the comparability of treatment principle. It reiterates its invitation to other bilateral official creditors to formally join the creditor committee.