March 1, 2024

Lukmaan IAS

A Blog for IAS Examination

SRI LANKA’S DEBT TREATMENT AGREEMENT

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TAG: GS 2: INTERNATIONAL RELATIONS

THE CONTEXT: Recently, Sri Lanka has reached an “agreement in principle” with India and the Paris Club group of creditors including Japan, on a debt treatment plan.

EXPLANATION:

  • The Debt treatment agreement will help the crisis-hit island nation tap the next tranche of the International Monetary Fund’s nearly-$3 billion recovery package.

BACKGROUND:

  • Sri Lanka, facing a severe economic crisis, defaulted on its nearly $51 billion foreign debt last year.
  • It necessitated a comprehensive restructuring of loans to initiate an economic recovery program supported by the International Monetary Fund (IMF).
  • The country approached major lenders and formed the Official Creditor Committee (OCC), which includes India, Japan, and France (as chair of the Paris Club), to negotiate debt treatment plans.

AGREEMENT WITH INDIA AND PARIS CLUB:

  • Sri Lanka has secured an “agreement in principle” with India and the Paris Club group of creditors, including Japan, outlining a debt treatment plan.
  • The debt treatment plan aligns with the parameters of the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF.
  • The Paris Club announced the agreement’s main parameters, without explicit details, and aims to formalize the agreement through a Memorandum of Understanding in the upcoming weeks.

OCC’S ROLE AND EXPECTATIONS:

  • The OCC was formed in response to Sri Lanka’s request for debt treatment and has engaged in discussions with the country’s authorities, evaluating options to restructure Colombo’s outstanding debt.
  • China, Sri Lanka’s largest bilateral creditor, opted to remain outside the platform but participated as an observer.
  • Japan and India, as significant lenders, stressed the importance of creditor parity and transparency.

EXPECTATIONS FROM OTHER CREDITORS AND PRIVATE ENGAGEMENT:

  • The OCC, alluding to China, emphasized the necessity for “other bilateral creditors” to share information transparently for evaluating the comparability of treatment regarding their bilateral agreements.
  • Additionally, the Committee urged Sri Lanka to continue engaging with its private creditors, aiming for an agreement at least as favourable as the terms offered by the OCC.

IMF’S STANDPOINT AND CONDITIONS:

  • The IMF, after reaching a staff-level agreement with Sri Lanka in October 2023, highlighted the significance of securing an agreement with official creditors on a debt treatment plan consistent with the Fund’s debt targets.
  • The next installment of the IMF package is contingent on this agreement, underscoring its criticality for Sri Lanka’s economic recovery.

CHINA’S ROLE AND AWAITED SPECIFICS:

  • While China has assured cooperation in Sri Lanka’s debt restructuring, ensuring transparent participation, the specific details of the potential debt treatment plan are yet to be disclosed.

PARIS CLUB:

  • The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries.
  • The members are:
    • The current permanent members of the Paris Club are Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
    • South Africa is a prospective member since 2022
  • As debtor countries undertake reforms to stabilize and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment.
  • Paris Club creditors provide debt treatments to debtor countries in the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).
  • The origin of the Paris Club dates back to 1956 when Argentina agreed to meet its public creditors in Paris.
  • Since then, the Paris Club has reached 478 agreements with 102 different debtor countries.
  • Since 1956, the debt treated in the framework of Paris Club agreements amounts to $ 614 billion.

SOURCE: https://www.thehindu.com/news/international/sri-lanka-reaches-agreement-with-india-paris-club-on-debt-treatment/article67587365.ece/amp/

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