April 20, 2024

Lukmaan IAS

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SRI LANKA’S DEBT DEAL PROGRESS AND IMF SUPPORT

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TAG: GS-2:  INTERNATIONAL RELATION (IR)

THE CONTEXT:

IMF Senior Mission Chief for Sri Lanka attends a press conference in Colombo, Sri Lanka March 21, 2024.

BACKGROUND OF STORY:

  • Sri Lanka, which in the 1970s was being hailed as a development success story for a low-income nation, is now mired in a financial and economic disaster, its worst yet since independence in 1948.
  • Despite notable investments in infrastructure projects, and a largely stable growth rate from 2013 to 2019, the Sri Lankan story was marred by a series of untimely and mismanaged economic measures that led to the current meltdown.
  • External factors have compounded the catastrophe, including the COVID-19 pandemic and the Ukraine-Russia conflict.
  • The six crucial economic issues that have led to the Sri Lankan crisis: the impact of the 2019 tax cuts on the domestic economy; successive BOP crises; a series of IMF bailouts that went wrong; the sudden disastrous switch to organic farming; the downfall of the tourism sector following the 2019 Easter Sunday bombings; and soaring external debt.

MORE ABOUT NEWS

Sri Lanka’s Debt Deal Progress and IMF Support

This passage describes Sri Lanka’s progress in securing a debt restructuring plan and receiving financial assistance from the IMF.

  • Debt Deal with India and Paris Club: Sri Lanka is close to finalizing a deal with India and a group of creditor nations (Paris Club) that involves:
    • Moratorium: A potential 6-year grace period before repaying the debt.
    • Reduced Interest Rates: Sri Lanka will likely benefit from lower interest rates on the debt.
  • Importance of the Deal: Finalizing this agreement is crucial for Sri Lanka’s economic recovery plan as it helps manage its external debt.
  • Private Creditors: Negotiations are ongoing with private creditors who hold a significant portion of Sri Lanka’s debt.
  • IMF Support: Sri Lanka is closer to receiving the next tranche (payment) of a $3 billion IMF loan package.
    • Progress on Reforms: The IMF commends Sri Lanka’s efforts in controlling inflation, building foreign reserves, and improving public finances.
    • Next Steps: The IMF board’s approval will release about $337 million, bringing the total IMF assistance to $1 billion so far.

Official Creditor Committee: Seventeen countries that have extended loans to Sri Lanka formed the Official Creditor Committee (OCC) to facilitate debt restructuring negotiations. China, while not part of the committee, has been attending meetings as an observer. Sri Lanka has assured the OCC that it will negotiate repayment of Chinese loans on comparable terms.

The Paris Club: A Lifeline for Debtor Countries

The Paris Club is an informal group of wealthy nations that work together to help countries struggling with debt repayment. The Paris Club acts as a forum for debtor countries to negotiate debt relief with a group of major creditor nations.

The key points:

  • History: Formed in 1956, it arose from a meeting between Argentina and its creditors in Paris.
  • Goal: To find sustainable solutions for debtor countries unable to repay their government-to-government loans (bilateral loans).
  • Members: The club comprises 22 developed economies, all members of the OECD (Organisation for Economic Co-operation and Development). These include major countries like the US, Japan, Germany, and France.
  • Track Record: The Paris Club has a long history of success, reaching agreements with over 100 debtor countries and restructuring over $614 billion in debt.
  • Shifting Landscape: While the Paris Club dominated bilateral lending in the past, China has emerged as a major creditor in recent decades.
  • Sri Lanka’s Case: For Sri Lanka, China is the biggest bilateral creditor, followed by Japan and India. Negotiations with the Paris Club are just one piece of their debt restructuring puzzle.

The scenario of Sri Lanka debt:

  • Sri Lanka in May 2022 became the first country in the Asia-Pacific to default on its debts in two decades , the result of domestic economic mismanagement and a surge in global inflation following the coronavirus pandemic.
  • Sri Lanka has foreign debts of about $40bn. China, Japan and India are amongst the largest creditors.
  • The IMF has cleared a $3-billion-Extended Fund Facility (EFF) in March 2023 for Sri Lanka but this loan facility has been stalled due to some disagreement between the creditors.
  • Major lenders, excluding China, formed the Official Creditor Committee (OCC) in May 2023 in response to Colombo’s request for debt treatment. It is co-chaired by India, Japan, and France (as chair of the Paris Club)

Source: https://www.thehindu.com/news/international/sri-lanka-to-secure-likely-six-year-moratorium-on-debt-owed-to-india-paris-club/article67976586.ece/amp/

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