Sri Lanka’s debt spiral

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SRI LANKA, 22 February 2023 (TON): International Monetary Fund agreed in principle to provide an emergency loan of US$2.9 billion, with the hope to essentially tide over the ongoing balance of payments issues. Unlocking these funds, however, depends on the IMF receiving assurances from major bilateral creditors that they will eventually provide an adequate amount of debt relief.

The Paris Club of traditional (Western) government creditors has provided the necessary assurances. China, however, is Sri Lanka’s biggest bilateral creditor and so far has only committed to a two-year moratorium on debt service payments – and only for loans for its EXIM bank. Beijing continues to argue that loans from China Development Bank – its other policy bank engaged in overseas lending – should be treated as commercial and outside the framework for official creditors.

Consequently, the IMF now appears to be considering an emergency program without China. Doing so carries significant risks – notably that China might benefit from IMF financing and any restructuring deal while contributing less in debt relief than other creditors.

Nonetheless, a way forward is desperately needed. The country’s economic woes are pushing many Sri Lankan households into poverty.
Ultimately, confronting the mounting human costs of Sri Lanka’s debt will require not only substantial (and urgent) debt relief but also a sizeable and sustained increase in concessional financing.


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