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Sri Lankan President Ranil Wickremesinghe last week made it clear that he wants China, the nation’s largest creditor, to join the talks on restructuring Sri Lanka’s debt. The talks were initiated by India, Japan, and France earlier this month, and China merely assumed the role of an observer in the ensuing proceedings.
China is the world’s largest bilateral lender, as per the World Bank. And Sri Lanka and Bangladesh are its top recipients. According to the latest government data, Sri Lanka owes $3 bn to China out of its overall bilateral debt of $7.1 bn. Among others, the country owes $2.4 bn to the countries of the 22-member Paris Club and $1.6 bn to India.
Previously, in May 2023, the island nation became the first middle-income country to default on its loans. This happened after it was unable to pay back the infrastructure financing that was granted to it by China and other countries.
Speaking to Nikkei Asia on May 25, Wickremesinghe said: “We wanted China to be on the common platform but China said no…We will not have separate deals…We won’t give advantage to one party..”
Weak macroeconomic outlook adding to Sri Lanka’s debt crisis
Faced with a crippling debt crisis, Sri Lanka was able to secure a bailout worth $3 bn from the International Monetary Fund (IMF) earlier this year.
“The objectives of the EFF (Extended Fund Facility)-supported program are to restore macroeconomic stability and debt sustainability, safeguarding financial stability, and stepping up structural reforms to unlock Sri Lanka’s growth potential,” said the IMF.
On Monday, Asian Development Bank (ADB) approved a $350 mn special policy-based loan for the country. It is part of the broader IMF package.
However, the global lender remains wary of the country’s macroeconomic outlook. As per the IMF, Sri Lanka’s economy is expected to contract by 3% in 2023. “Recent macro data has turned out more positive than the IMF’s projections, but the prospect of a painful and complicated debt restructuring limits upside,” said Oxford Economics.
Apart from Sri Lanka’s debt crisis, inflation appears to be a serious concern for the country’s economy. The country has been seeing growing inflation since early last year. In September 2022, the National Consumer Price Index recorded an all-time high headline inflation rate of 69.80% year on year.
A surge in the cost of living, fueled by shortages of basic necessities, sparked widespread protests and, eventually, the collapse of Sri Lanka’s government in 2022. However, there has been some relief since then.
“Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index decreased to 35.3% in April 2023 from 50.3% in March 2023,” said the Central Bank of Sri Lanka.
“Looking ahead, based on the available information, the anticipated declining trend of inflation is expected to continue through 2023, bringing down the prevailing high inflation towards single-digit levels by late 2023,” it added.
