China – Sri Lanka: Unexpected Debt Restructuring Agreement
Colombo is expected to first pay off its debt to China, which accounts for 52% of the island's bilateral debt, while two other creditors, Japan and India, will have to wait in line to get their money back
China unexpectedly said it had reached a preliminary agreement with the debt-ridden Sri Lankan government to “dispose” of accumulated debts to Beijing, which amount to 52% of the island’s total sovereign debt. The deal could mean that Colombo’s other creditors will now have to get in line to claim their money back.
A few days before the opening in Beijing of the Third International Forum on China’s Belt and Road Initiative, known as the New Silk Road, which will also be attended by Russian President Vladimir Putin on October 17-18, the Chinese Foreign Ministry announced that at the end of September, the state-owned Export-Import Bank of China gave the first green light to an agreement on restructuring Sri Lanka’s external debt. “At the end of September, EXIM Bank of China, as an official creditor, reached a preliminary agreement with Sri Lanka on the sale of China-linked debt,” ministry spokesman Wang Wenbin said, without elaborating.
The deal caught Japan and India, the South Asian island’s two other major creditors, by surprise. Even the International Monetary Fund (IMF) was unaware of the top-secret negotiations between China and Sri Lanka. Peter Brewer, who heads Sri Lanka’s desk at the IMF, said he was “aware of the negotiations that the island’s financial authorities were having with its creditors, including Paris Club creditors, but he hadn’t a slightest idea that the agreement with the Chinese EXIM Bank has already been signed.” Brewer also emphasized that “before signing any debt restructuring agreement, the Fund very carefully reviews all financial agreements signed by the debtor state.”
This means China “set a trap” for the other two main creditor countries of Sri Lanka, primarily Japan and India, which, in the drafts of their respective agreements on the restructuring of Sri Lanka’s debts, categorically wanted to include a clause, according to which “the government of Sri Lanka will be strictly prohibited to first repay debts incurred to China.”
This announcement, of course, will not improve relations between China and Japan, which have been at loggerheads for months over the issue of the release of disinfected water from the former Fukushima nuclear power plant into the Pacific Ocean, or relations with India, China’s main economic rival in Asia and in the entire Global South.