China backs Sri Lanka, clears way for IMF's $2.9B bailout
China has assured Sri Lanka a two-year moratorium for 2022 and 2023, paving the way for the International Monetary Fund's (IMF) $2.9 billion bailout. Now, Colombo won't have to pay back the principal and interest to China's Export and Import Bank for these two years. The IMF's loan to Sri Lanka will now be determined by the outcome of China's two-year moratorium.
Why does this story matter?
- Notably, China is a close ally and the largest bilateral creditor of Sri Lanka.
- Last year, Sri Lanka faced the worst economic crisis since its independence, stemming from a foreign exchange crisis resulting in shortages of essential supplies, which triggered mass protests.
- The IMF bailout will help the island nation recover from bankruptcy and catalyze more funding for debt restructuring since last year's default.
Sri Lanka to get $2.9 billion over 4 years
In a written reply to Colombo's request, China's Exim Bank said it would provide the extension as an immediate contingency to relieve the former's debt repayment pressure. The IMF-Paris Club earlier proposed a 10-year moratorium and 15-year loan restructuring to Colombo. The IMF, under its Extended Fund Facility (EFF), will give Sri Lanka a $2.9 billion loan over four years in eight half-yearly installments.
Sri Lanka has 6 months to sign bilateral agreements
The first tranche of the EFF to Sri Lanka will follow the Bretton Woods Institution's executive board meeting in Washington later this month. After the approval, Colombo will enter a bilateral agreement with the lender countries within six months to equally distribute the reduction in the stated value of the loan. Sri Lanka's foreign exchange reserves are down to $500 million.
Sri Lanka currently owes $7.4 billion to China
Currently, Sri Lanka owes $7.4 billion to China, $1 billion to India as bilateral debt and another $4 billion it received outside of bilateral debt during its economic crisis over the past two years. Meanwhile, China's Exim Bank claims to have funded a slew of roads, ports, airports, and power projects in Sri Lanka, among which 40 projects have already reportedly been completed.
India gave financial aid of $4 billion to Sri Lanka
India provided Sri Lanka with $4 billion in financial aid to help its neighbor regain stability, including $700 million worth of petroleum products, for which the latter expressed its gratitude. The loan was released based on a debt sustainability analysis by the IMF-Paris Club.
