China’s Role in Sri Lanka’s Debt Restructuring

China’s Role in Sri Lanka’s Debt Restructuring

What Happened: Since defaulting on its sovereign debt, Sri Lanka has been working with creditors to restructure its debt in order to access funds from the IMF. Crucial to this process is China, Sri Lanka’s largest bilateral lender, and a country that historically has not played well with others when it comes to debt negotiations. While Beijing has offered debt relief in the past, it has typically been limited to official development assistance (rather than the infrastructure loans Sri Lanka took out) and done in a bilateral, rather than multilateral, setting.

Our Focus: To understand China’s role in Sri Lanka’s debt restructuring, we first have to get a handle on the extent and amount of Chinese loans to Sri Lanka. “While the often-cited number is that Sri Lanka’s debt to China is approximately 10 to 15 percent of its total public external debt, its debt to Chinese creditors amounted to approximately $7.3 billion, or 19.6 percent, of the country’s total outstanding foreign debt,” Sri Lankan economic researchers Umesh Moramudali and Thilina Panduwawala write for The Diplomat. Most of Sri Lanka’s debt to China came in the form of export credits that were used to finance infrastructure projects – with Chinese SOEs receiving the funds as payment for construction work.

What Comes Next: The types and sources of these loans matter a great deal for future restructuring negotiations. “Sri Lanka has borrowed heavily from both China Exim and China Development Bank, which operate in separate ways, so they cannot be expected to act in concert in the debt restructuring negotiations,” Moramudali and Panduwawala explain. And Chinese banks have historically been resistant to write off export credit loans, for fear of both encouraging other countries to demand similar treatment and incentivizing China’s own SOEs to pursue financially risky projects, with policy banks left holding the bag. As a result, Sri Lanka’s domestic economic crisis is now tightly intertwined with domestic politics and economic policy within China – thus the slow pace of debt restructuring talks.