Sri Lankan authorities formally presented on Tuesday a request for debt treatment in the first meeting of the official bilateral creditors’ committee, the Paris Club said in a statement.

According to Reuters, the committee, co-chaired by India, Japan and France, consists of 17 members and includes Paris Club creditors as well as other official bilateral creditors.

Paris Club members with no claims on Sri Lanka, such as Saudi Arabia and Iran, were observers at the meeting, according to the statement.

Meanwhile, China also attended as an observer the first meeting of Sri Lanka’s creditor nations on Tuesday.

A move that offers policymakers some hope Beijing will become more engaged in talks to resolve the debt woes of low- and middle-income countries across the world.

The meeting, within a new framework launched in Washington D.C. in April that creditors hope will serve as a model to resolve the debt difficulties of middle-income economies, was held online.

Japan, which initiated the launch together with India and France, invited all bilateral creditors, including the largest, China.

Masato Kanda, Japan’s top financial diplomat, told reporters after the meeting that China attended as an observer, adding he hoped it would participate as a full member in future meetings.

Last month, France, India and Japan unveiled a common platform for talks among bilateral creditors to co-ordinate restructuring of Sri Lanka’s debt.

Sri Lanka owes $7.1 billion to bilateral creditors, government data show, with $3 billion owed to China, followed by $2.4 billion to the Paris Club of creditor nations and $1.6 billion to India.

The government also needs to renegotiate more than $12 billion of debt in Eurobonds with overseas private creditors, and $2.7 billion of other commercial loans.

Sri Lanka has kicked off talks to rework part of its domestic debt and aims to finalise a deal by May. (NewsWire)

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Sri Lanka’s creditor nations will meet today for their first meeting to coordinate debt restructuring within the new framework launched in Washington D.C. in April, it was reported

According to Reuters, as Sri Lanka’s creditor nations prepare for their first meeting on Tuesday to coordinate debt restructuring, the focus is turning to whether China will attend.

The meeting, within a new framework launched in Washington D.C. in April that creditors hope will serve as a model to resolve the debt difficulties of middle-income economies, is to be held online.

Japan, which initiated the launch together with India and France, has invited all bilateral creditors, including the largest, China, though Japanese officials said it was uncertain whether it would join the talks.

The reason was not immediately clear, although one of the officials felt Beijing could be weighing the merit of participation.

Last month France, India and Japan unveiled a common platform for talks among bilateral creditors to coordinate the restructuring of Sri Lanka’s debt.

Sri Lanka owes $7.1 billion to bilateral creditors, government data show, with $3 billion owed to China, followed by $2.4 billion to the Paris Club and $1.6 billion to India.

The government also needs to renegotiate more than $12 billion of debt in Eurobonds with overseas private creditors, and $2.7 billion on other commercial loans.

Sri Lanka has kicked off talks to rework part of its domestic debt and aims to finalise the deal by May. (NewsWire)

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All stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes – impact on the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector, the Sri Lanka Banks’ Association (Guarantee) Limited stated. 

Issuing a statement, the SLBA said it is necessary to arrive at a consensus with creditors that repayment relief will be afforded to the Government of Sri Lanka (GoSL) by their debt holders to enable repayment to commence within sensible repayment capacity limits that do not result in social strife and political disruption.

The management of this process including priorities of the GoSL through their agents, the IMF expectations and all public debt holders is admittedly difficult given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful, it added. 

Full statement:

The Sri Lanka Banks’ Association (SLBA) represents all of the licensed banks in Sri Lanka and underpins all sectors of the economy. The banking sector is the main mechanism through which the Central Bank of Sri Lanka (CBSL) implements monetary policy influencing the financial markets. The stability of the banking system is critical for the national interest. 

GoSL Public Debt Restructuring and Concerns of the Banking Sector

“Having run an unsustainable macroeconomic model in tandem with the longstanding deficits in the budget balance and the external current account, the economy had fully exhausted its buffers by early 2022 as it was straddled by a myriad of vulnerabilities that emanated from both global and domestic sources”. 

CBSL Annual Report 2022

In this background, the country’s debt repayment burden was declared unsustainable in April 2022 and proceedings were initiated to seek International Monetary Fund (IMF) help via financing the acute balance of payments deficit. In this process, it is necessary to arrive at a consensus with creditors that repayment relief will be afforded to the Government of Sri Lanka (GoSL) by their debt holders to enable repayment to commence within sensible repayment capacity limits that do not result in social strife and political disruption.

The management of this process including priorities of the GoSL through their agents, the IMF expectations and all public debt holders is admittedly difficult given the diversity of interests. However, the lack of transparency in the negotiations with the SLBA member bank consortium is unhelpful.  

The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes – impact to the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimise the risk to the sector. A further escalation of the situation we are in must be avoided.

It must be borne in mind always that the banking sector will have to play an active role in Sri Lanka’s economic revival process. The sector Capital Adequacy Ratios (CAR) and Liquidity Coverage Ratios (LCR) are presently within the regulatory requirements. This position must not be depleted through any action including a debt restructuring that threatens the stability of banks and erodes public confidence. 

Banks have asked for clarity on what is meant by “voluntary” debt optimization, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury Bills / Treasury -Bond holders such as the superannuation and pension funds and state-owned Banks), more disclosure on proposed Domestic Debt Optimisation (DDO) and International Sovereign Bond (ISB) re-structuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility (EFF) and whether proposed DDO  would resemble the experience of some other countries who have taken this route before us. 

Banks have consistently supported the GoSL and CBSL’s efforts over the years through severe economic hardship that led to both public anxiety and political upheaval reflected in crises especially in recent times with debt repayment moratoriums, rescheduling of viable businesses and necessary recovery arrangements on generally disadvantageous terms predicated by the many incidents of inclement weather, post Easter Sunday 2019 attacks, Covid-19 pandemic, political, and social unrest. Credit impairments have hit an all-time high hitherto unseen. Taking further impairment costs on top of these strains on Capital and Liquidity is not sustainable specially with the tax deductibility of these necessary costs of being in business being uncertain. 

The banks reiterate that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made. (NewsWire)

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Sri Lanka will hold two separate discussions on debt restructuring prior to talks with private creditors, President Ranil Wickremesinghe informed the Parliament today (26).

Making a special statement in Parliament, the President stated that one discussion on debt restructuring will be held with the Paris Club and India on one platform.

He further stated that a separate discussion on debt restructuring will be held with China after which discussions will get underway with private creditors.

Briefing the Parliament on the agreement with the International Monetary Fund (IMF), the President stated that Sri Lanka is expected to receive financial assistance of USD 3 billion within the next 4 years. 

The President revealed that Sri Lanka can expect to obtain a total of USD 7 billion as financial assistance from various institutions following the necessary discussions. 

“We cannot put conditions prior to the discussion as it will result in the other party also putting forth conditions. We have to first engage in discussions and then look at the various issues,” he said. 

The President further revealed that some banks have raised concerns that the Colombo Stock Exchange (CSE) will collapse due to certain measures taken with regard to the banking system.

“If that is the case and the CSE collapses, then I will shut it down. Various sectors cannot come forth and put conditions at a time when the country is slowly moving forward. The matter will be discussed at the Parliament and a final decision will be taken at the Parliament, which will be conveyed to the relevant sectors,” he said. 

President Ranil Wickremesinghe pointed out that 08 months after the unrest in July 2022, Sri Lanka has now made a comeback, stating “This is Sri Lanka’s comeback story.”

The President also urged the whole country, including opposition political parties, to join in the efforts to resurrect Sri Lanka. (NewsWire)

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Sri Lanka’s sovereign lenders have yet to inform the government how they will engage with the country to restructure its $7.1 billion of debt and whether they will form an official committee or engage in bilateral talks, Sri Lanka’s Central Bank Governor told Reuters in an interview on Tuesday. 

According to Reuters, Sri Lanka aims to formally engage in debt negotiations with overseas creditors that include China, India and the Paris Club group of nations in May, after concluding a debt rework with holders of its domestic debt.

“It’s up to the creditors to decide. We are happy if there is one platform, as it would be easier to discuss and share information,” Central Bank Governor Nandalal Weerasinghe said.

“Whether they are coming together or on a separate bilateral basis, we will have comparable debt treatment,” Weerasinghe said on the sidelines of the World Bank and International Monetary Fund spring meetings in Washington.

As a middle-income country, Sri Lanka is not able to apply for relief under the Group of 20 common frameworks for debt treatments, so how the government can engage with creditors is not formally outlined.

But is unclear whether a formal committee could secure a swift overhaul, as the platform has failed to speed up debt restructuring talks for common framework countries such as Zambia.

DEBT REWORK INSTRUMENTS

Sri Lanka, caught in the worst financial crisis since independence from Britain in 1948 triggered by a severe shortage of dollars, has seen steep inflation, a currency plunge and its economy slide into recession.

It recently secured a $2.9 billion loan from the IMF and also aims to get debt relief from over $12 billion owed to holders of sovereign bonds.

When asked if the country would consider debt-for-nature swaps for all its overseas creditors, Weerasinghe said that “those are useful and relevant financial instruments,” though the country’s main goal is to complete the debt rework process “as soon as possible.”

“If creditors say that they would like to have those instruments, that it can be done within the timeline and do it fast, we are open,” the central bank chief said.

Sri Lanka’s foreign private creditors are considering swapping the country’s defaulted bonds for new securities where cash flow is linked to future economic growth. “Everyone can come and offer those kinds of solutions, and as we engage with them, we can see whether to include them or not.”

The central bank governor said that additional financing through the IMF’s Resilience and Sustainability Trust (RST) to address climate change’s impact on the economy could be available, but only after the country recovers its debt sustainability under the Washington-based lender programme. (NewsWire)

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Chinese Premier Li Keqiang has informed the International Monetary Fund (IMF) that China is willing to play a constructive part in debt talks involving heavily indebted nations, Bloomberg News reported.

According to Bloomberg News, China Central Television (CCTV) reported that Chinese Premier Li Keqiang told the head of the IMF that China is open to participating in multilateral efforts to help heavily indebted nations “in a constructive manner.” 

“China is willing to take part in resolving relevant countries’ debt issues,” Li said in a phone call Wednesday with IMF Managing Director Kristalina Georgieva, according to CCTV. “China maintains that all sides should take joint action and share the equitable burden,” he said.

China, a major lender to debt-laden countries such as Sri Lanka and Pakistan, is mired in disputes with multilateral banks over which parties should take the lead in restructuring sovereign debt. 

Bloomberg News reported last month that the IMF is considering approving a Sri Lanka bailout without the formal assurance of debt-restructuring support from Beijing. 

The Chinese government, which accounts for about 52% of the bankrupt nation’s bilateral debt, has offered term extensions via the state-owned policy lender Export-Import Bank.

IMF Chief Kristalina Georgieva told Li that the IMF wants to strengthen coordination and cooperation with China to handle the debt crisis in developing countries, CCTV reported. (NewsWire)

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