India ready to restructure its Colombo debt: What about others?

Dr. Jaishankar is in Sri Lanka to help under the “neighborhood first” strategy of India

By R. R. M Lilani?

Dr. Jaishankar, India’s Foreign Minister, who is scheduled to arrive in Sri Lanka on January 19, 2023, has made another ‘neighbourhood first’ agreement with Sri Lanka by backing the country’s delayed debt restructuring programme with its three donors China, India and Japan, in order to obtain a 2.9 billion USD loan facility from the International Monetary Fund (IMF), which has urged the Sri Lankan government to work quickly on it.?

Dr. Jaishankar will be leading a delegation from the Indian Ministry of External Affairs, including Joint Secretary (IOR) Puneet Agrawal, Director Sandeep Kumar Bayyappu, Deputy Secretary (Sri Lanka) Nidhi Choudhary, and Deputy Secretary Raghoo Puri.

Donor countries’ assistance has been critical as the island nation’s 21 million people have struggled to make ends meet due to increasing prices of essential goods caused mostly by the energy crisis and its ailing forex. The economy reached its lowest point in 2019 when Islamic extremists bombed multiple churches on Easter Sunday, followed by a pandemic and political unrest, with huge rallies by citizens against a corrupt leadership that was taking a toll on its population.

India has informed the International Monetary Fund (IMF) that they “will support Sri Lanka’s debt restructuring plan,” which has been a roadblock in Sri Lanka’s pursuit of the IMF’s loan facility at a time when Sri Lanka is suffering financially. India provided financial, economic, and humanitarian assistance worth nearly USD 4 billion last year alone.

The Department of Economic Affairs, Ministry of Finance of India has noted that financing/ debt relief provided by Export-Import Bank of India will be consistent with restoring debt sustainability under the IMF-supported programme. ?We understand that the IMF’s debt sustainability assessment will be underpinned by the programme targets of ? reducing the ratio of public debt to GOP to below 95 percent by 2032, the central government’s annual gross financing needs below 13 percent of GOP on average in 2027-32, and the central government’s annual foreign currency debt service below 4.5 percent of GOP in every year in 2027-32; and closing Sri Lanka’s external financing gap,? Indian Ministry of Finance said.?

The IMF stalemate went on for over a year since China gave no indication that it would agree to restructure its loan to Sri Lanka, which raised eyebrows. Although the Sri Lankan government is “optimistic” about it, it is still unknown whether China has agreed to it like the Indians did. However, during the recent visit of Chen Zhou, Vice Minister of the Communist Party of China (CPC) and Head of the CPC International Department, he had told Prime Minister Dinesh Gunawardane that “Sri Lanka is a very special friend of China” and that “they will have some good news soon.”

China is considered the largest lender, with a USD 7 billion credit to Sri Lanka, compared to a USD 1 billion loan from India.

On the other hand, Japan recently said that before moving on with other development initiatives, Sri Lanka must first secure an IMF loan. Japanese Ambassador Hideaki Mizukoshi? said in August that for Sri Lanka to improve its economic and financial situation while maintaining its openness, the government must work with the IMF and the Paris Club. Japan added that it will maintain considering the best course of action while closely monitoring these developments and the circumstances in Sri Lanka, as well as in consultation with Sri Lanka and other donors and international organizations.

Official notice has been given by India to the IMF Board that it will assist Sri Lanka in securing the bailout package and provide its Extended Fund Facility (EFF). Sources claim that the Export-Import Bank of India will offer the funding and debt relief.Dr. Jaishankar has appointments with President Ranil Wickremesinghe, Prime Minister Dinesh Gunawardena, and other dignitaries in addition to his official meetings with Foreign Affairs Minister Ali Sabry once he arrives in Sri Lanka.

India has emphasized to the IMF Board that Sri Lankan authorities are anticipated to seek equitable debt treatment from all commercial creditors and other official bilateral creditors, as well as adequate financing contributions from the multilateral development banks, and that they stand ready to support IMF’s efforts on these. ?

However, India’s USD 4 billion support in 2022 has been significant compared to the USD 2.9 billion IMF package, and still Sri Lanka intends to restore its economy, which is impossible until both domestic output and exports are raised. The governor of the central bank, Dr. Nandalal Weerasinghe, issued a warning that if the current economic system is disrupted or changed in any way, the long lines that lasted for more than six months last year may reappear.

He made it quite clear that “if the country obtains enough foreign exchange, the economy will be stable. ?We have so far only managed to manage a small amount of foreign exchange, and we have only utilized it to buy necessities,” he emphasized in a recent television interview.

However, the IMF accreditation is seen by the Sri Lankan government as being crucial to achieving debt sustainability. The GoSL stated that the IMF’s assistance is crucial since the country is looking at USD 2.9 and beyond, and not just the IMF’s intervention but also it would attract other countries? interventions. The IMF’s confidence would ensure and provide additional assurance that the required reforms will be accepted to obtain other bilateral and international obligations as well as potential funding.

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