SL begins uphill task of convincing India, China and Japan on debt restructure
Sri Lanka is likely to face an uphill task to reach consensus on debt restructure with creditors on a repayment plan amidst severe economic crisis and preemptive debt default, several economic experts warned.
Financial advisory group Lazard has started talks with India, China and Japan on restructuring Sri Lanka’s debt, a spokesman for the government said on Tuesday, as the crisis-hit island nation seeks an International Monetary Fund (IMF) bailout.
Lazard was hired by Sri Lanka in May, along with international lawyers Clifford Chance, to guide the government through the process of restructuring its debt, for which estimates range from $85 billion to well over $100 billion.
Earlier this month, the IMF said it had reached a preliminary agreement with Sri Lanka for a loan of about $2.9 billion. But for the deal to go through, the country will require debt relief from China, India and Japan, its three main international lenders.
“They are in the process of speaking to India, China, Japan, mainly to ensure we come to some sort of consensus,” acting cabinet spokesperson Ramesh Pathirana told reporters, referring to Lazard.
“We will keep our fingers crossed that we will be able to come to an agreement.” The three countries hold about $13 billion of Sri Lanka’s debt, while China is Sri Lanka’s largest bilateral creditor.
Sri Lanka is also expected to formally reach out to private creditors who hold about $12 billion in bonds later this week, a government source told media .
“The government is planning to start talks with the ambassadors of China, U.S., Japan and India next week on debt restructuring,” the source said, declining to be named as he was not authorized to speak to media.
Sri Lanka is likely to face an uphill task to reach the ambitious primary surplus target set out by the International Monetary Fund (IMF), which requires a significant increase in State revenue through revenue-based fiscal consolidated measures, according to a top economist.
“The IMF is asking Sri Lanka to reach a primary surplus of 2.3 percent of GDP by 2025. It requires a huge effort even by the standards of large fiscal adjustments in EM. Improvements of more than 4 percent of GDP aren’t common.
Sri Lanka is aiming for more than 6 percent,” Deputy Chief Economist at Institute of International Finance (IIF) and former IMF economist Sergi Lanau said in a recent tweet.
Emphasising the need of enter in to consensus with creditors on debt restructuring, IMF mission chief Peter Breuer said that all those creditors should agree to ensure debt sustainability but if a single creditor is disagreed with the on going process, Sri Lanka’s economic crisis would deepen.
The assurance of all creditors including China on debt restructuring is essential prerequisite for the IMF to get the Executive Board endorsement and begin the disbursement of tranches of four year Extended Fund Facility of US$ 2.9 billion, he explained.
Sri Lanka’s bargaining power will be weakened by the new court case against it. If the New York Federal Court delivers its judgement in favour of Hamilton Reserve, Sri Lanka will have to make the full payment . If it does so, the other creditors will also ask for the same treatment on the principle of equal treatment.
Then, the debt restructuring plan will come to a standstill. If it does not pay, it will amount to a default and the country runs the risk of its assets within the jurisdiction of the court being confiscated to recover the debt.