China Surprises With Sri Lanka Debt Deal Ahead of IMF Talks

Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka

The Lede: The Chinese foreign ministry said on Tuesday that it had reached a debt agreement with Sri Lanka ahead of separate talks planned by the International Monetary Fund and other creditors of the South Asian nation. The surprise move comes as China seeks a leading role among Global South countries.

What We Know:

At a daily press conference, China’s Foreign Ministry spokesperson Wang Wenbin said that a deal between the state-owned Export-Import Bank of China and Sri Lanka was reached late last month. On Thursday, Sri Lanka’s finance ministry announced that the deal covers $4.2 billion of the island nation's outstanding debt.
The IMF, Paris Club members, including Japan, India, and other lenders, are expected to hold talks this week in Morocco on a debt restructuring plan. Despite being one of Sri Lanka’s biggest creditors, China is not part of that group. It has been pursuing bilateral negotiations with Sri Lanka instead.
The official creditors committee aimed to sign a memorandum of understanding with Sri Lanka regarding the debt at the Marrakech meeting without the participation of China. An announcement on that deal is looking increasingly unlikely.

The Background: According to estimates from the IMF Sri Lanka owes about 40% of its bilateral debt to China at around $7 billion and 16% to India. Sri Lanka is also in talks with the IMF regarding a $2.9 billion bailout. Sri Lanka’s central bank governor Nandalal Weerasinghe and junior finance minister Shehan Semasinghe are in Marrakech this week at the IMF and World Bank annual meetings.

Likely Outcomes:

The Exim Bank deal comes a week before China hosts its third Belt and Road Forum in Beijing. This move is likely a signal to dispel the criticism that China has taken for burdening Global South nations like Sri Lanka with debt through the BRI. Moving forward, China appears to be shifting toward more targeted and cost-conscious BRI projects following the past decade of large flagship infrastructure constructions that have led to sizeable bailouts from Beijing to some participating countries.
Reaching a deal with its creditors will allow Sri Lanka to continue accessing funds from its $3 billion bailout program with the IMF. However, the bilateral debt option with China may look increasingly interesting in comparison as China pursues a leadership role among Global South countries. As part of this plan, Beijing may offer competitive debt plans to such countries to outbid Western-led institutions.
The U.S. may also ramp up its own infrastructure spending program, the Partnership for Global Infrastructure and Investment (PGII) to step in where China does not offer the best deals. U.S. President Joe Biden has already announced a new economic land and sea corridor from India through the Middle East to Europe as part of the initiative.

Quotables:

“We will continue to support Chinese financial institutions in actively consulting with Sri Lanka. We are ready to work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development. We call on multilateral institutions and commercial creditors to take part in Sri Lanka’s debt restructuring based on fair burden-sharing.” – Wang Wenbin, Chinese foreign ministry spokesperson

"I think some media outlets use it to advance their agendas...Chinese investment was and has been very important to us. Sri Lanka had been depressed for 26 years. No investment was forthcoming. Everybody was adopting an empty approach, but the Chinese investment came and propelled the growth in Sri Lanka. Therefore, we are very grateful for that…We are not going to blame somebody else for that and we need to take ownership of that. We had serious policy deficiencies. We are now addressing those issues, overcoming them, and getting back to a sustainable way forward" – Ali Sabry, foreign minister of Sri Lanka

“We have not yet been informed about any specific agreements [and will have to] assess the entire package of agreements in its totality to assess consistency with IMF debt targets.” – Peter Breuer, senior mission chief for Sri Lanka at the IMF

Good Reads:

IMF Caught Off Guard as China Strikes Sri Lanka Debt Deal (Bloomberg)

Sri Lanka says deal with Chinese bank covers $4.2bn in debt (Nikkei)

IMF says Sri Lanka debt talks ongoing, unaware of specific deals (Reuters)

China to work with international organizations, other creditors to help resolve Sri Lanka’s debt problems: Foreign Ministry (Global Times)