China extends two-year moratorium to cash-strapped Sri Lanka

In a big respite to cash-strapped Sri Lanka, China on Monday offered a two-year loan moratorium to its close ally for the year 2022 and 2023 to relieve Colombo’s short-term debt repayment pressure.

China’s Export and Import Bank Vice President Zhang Wencai informed the Sri Lankan regime in writing that the bank is going to provide an extension on the debt service due in 2022 and 2023 as immediate contingency based on the request from Colombo. This means that Sri Lanka will not have to repay the principal and interest due to the bank’s loan during 2022 and 2023.

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The letter further stated that the bank would like to expedite the negotiation process with Colombo regarding the medium and long-term debt treatment during 2023 with a view to finalise debt treatment in the coming months. This essentially means that China’s support to IMF’s extended fund facility (EFF) of USD 2.9 billion over four years in eight six monthly instalments to Sri Lanka is conditional on the outcomes of the two-year moratorium.

“The bank will support Sri Lanka in your application for IMF EFF to help relieve the liquidity strain. In the meantime, adequate contributions from all the creditors would be a critical condition for a speedy solution as desired by all the parties. We will continuously call on commercial creditors (including the international sovereign bondholders) to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make corresponding contributions,” said the Chinese Exim Bank Vice President in the letter.

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With the Chinese bank supporting the IMF process, Sri Lanka will get the first tranche of EFF after the executive board of the Bretton Woods Institution meets in Washington later this month. Following the approval, Sri Lanka will have to enter into a bilateral agreement with creditor nations within six months so that the haircut on the loan taken is equally distributed.

While Sri Lanka owes USD 7.4 billion in debt to China, it owes one billion USD to India as bilateral debt and another USD four billion given outside the bilateral debt during the food, fuel and medicine crisis in Sri Lanka over the last couple of years.