The China Question

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IMF Staff yesterday approved an ‘extended fund facility’ (EFF) of US$ 2.9 billion to Sri Lanka.

However, IMF’s Senior Mission Chief to Sri Lanka, Peter Breuer, speaking to the media in Colombo yesterday, warned that to obtain IMF Board approval for its disbursement would be conditional to creditor agreement to restructure Sri Lanka’s debt. IMF has deemed that such debt is unsustainable. The island declared itself bankrupt in April.

Currently, China is reluctant to restructure Sri Lanka’s debt. Instead, it’s amenable to give more loans to Sri Lanka of unknown interest rates to repay existing loans. Loan restructuring however means reducing the interest cost of existing loans, extending the payback period and reducing the ‘credit capital’ repayable in certain instances.

Breuer said that most of such credit obtained by
Sri Lanka was from outside the Paris Club. “The Paris Club is a known quantity with which the IMF has worked on previous instances of debt restructuring of distressed countries,” he said. China is not a member of the Paris Club. The Paris Club includes all G7 countries, USA, Japan, UK, Germany, France, Canada and Italy which has en bloc agreed to restructure its credit extended to Sri Lanka.

Breuer said that it is both in the interest of Sri Lanka and of its creditors to agree to restructure the former’s debt. “In Sri Lanka’s case, it will once more help the country to grow,” he said. “But it’s not the IMF’s business to talk to its creditors,” he said. Nonetheless, financial advisers employed by Sri Lanka for this purpose are involved in negotiating with its creditors, said Breuer.

IMF’s Mission Chief to Sri Lanka Masahiro Nozaki, who also participated in this briefing, said that the $ 2.9 billion EFF approved by the ‘IMF Staff’ is sufficient because it will have a catalytic effect, drawing funds to the country from other multilateral agencies. Two of Sri Lanka’s key partners, the USA and Japan have been urging the country to come to an agreement with the IMF on debt restructuring.

“The $ 2.9 billion EFF approved by IMF Staff will be disbursed over a four-year period with disbursements to be made in tranches with the interest charged, including SDR interest plus other charges, said Nozaki. He however refused to say what the current SDR interest charge is.

However, a glance at the IMF website showed that the present SDR interest rate is 1.566 per cent and when taken together with all other charges, the total interest component works out to 4.366 per cent. Meanwhile a commercial loan taken from China by Sri Lanka to build the Hambantota Port had an interest component of 6.3 per cent. That Port is now in China’s hands on a debt to loan swap as Sri Lanka was unable to service the loan.

“The respective values of the tranche disbursements in IMF’s $ 2.9 billion EFF to Sri Lanka are technical,” said Nozaki. Tranche payments are subject to Sri Lanka conforming to IMF conditionality, including introducing wealth tax, said Nozaki. He said that the first tranche of this $ 2.9 billion EFF would be available no sooner the IMF Board approves it.

If the $ 2.9 billion EFF is approved by the IMF Board, it will be the single largest facility that Sri Lanka will have had obtained from the IMF thus far. The largest IMF facility that it has thus far obtained from the IMF is a
$ 2.6 billion loan, known in IMF’s nomenclature as a Standby arrangement (SBA). This SBA was approved in July 2009 with the final disbursement made in 2013. It was made available when Sri Lanka was facing a balance of payments crisis of less severity than what it is today.

According to the then Central Bank of Sri Lanka Governor Ajith Nivard Cabraal, the SBA was approved by the IMF due to Indian pressure. Previously the USA had pressured the IMF not to approve this programme due to various allegations of human rights abuse. India had said that if the IMF doesn’t approve this facility India would, forcing the IMF to approve it, said Cabraal.