Sri Lanka’s creditors hold 1st meeting, with China as observer

Sri Lanka’s creditor nations held their first meeting Tuesday to discuss restructuring the country’s debt. But the largest creditor, China, stood by as an observer, raising doubts over the success of the process.

Twenty-six nations took part in the virtual meeting, where participants agreed to reduce Sri Lanka’s debt at an early date. Japan, France and India co-chaired the meeting.

Masato Kanda, Japan’s vice finance minister for international affairs, told reporters after the meeting he would continue to call upon China to participate as a full member in future meetings.

“Even in the event that [China’s] official participation is not forthcoming, the process with the creditor nations is expected to move forward,” Kanda said. “We’ll continue to negotiate without losing momentum.”

The meeting would be undermined if China and Sri Lanka alone engaged in debt negotiations that produce more favorable terms for China than for other creditor nations. Japan has called on Sri Lanka not to hold talks outside the creditor nations meeting framework.

Sri Lanka’s economy depends heavily on tourism, which ground to a near halt during the pandemic. Sri Lanka became the first middle-income nation to essentially fall into default in May last year after failing to repay infrastructure funds extended by China and other countries.

Inflationary pressures have placed low- to middle-income nations in dire straits. Interest rate hikes in wealthier economies have added extra debt-servicing burdens on debtor nations, creating the risk that the problems will spill over from low-income nations to other middle-income nations.

A study led by Boston University showed that 61 developing and emerging economies are in debt distress or face high risk of debt distress.

The creditor nations meeting is significant because it targets a middle-income nation. Finance and central bank chiefs from Group of Seven nations will meet in Japan starting Thursday, when they are expected to discuss the debt problems affecting low- to middle-income nations.

The Paris Club, made up of financial officials from high-income nations, has been tackling debt problems in the developing world, but that era is steadily changing. Now emerging nations like India and China are taking bigger roles in providing support.

Sri Lanka’s external debt totaled $35.1 billion at the end of September last year, according to Japan’s Finance Ministry. China is the biggest bilateral creditor, followed by Japan and India.

Sri Lanka occupies a strategic location in a sea lane connecting East Asia with the Middle East and Africa. In April last year, India lobbied the International Monetary Fund to provide assistance to Sri Lanka.

In March, the IMF approved $3 billion in loans to Sri Lanka over four years. After initially expressing reluctance, China indicated willingness to cooperate with Sri Lanka on restructuring debt as requested by the IMF.

(Nikkei Asia)