Sri Lanka announces debt deal with China after IMF withholds bailout package

by Ephraim
Oct 13, 2023

Sri Lanka has reportedly reached a deal with China’s Exim Bank to restructure $4.2bn of debt, as it looks to release the second tranche of an International Monetary Fund (IMF) bailout package that was withheld last month.

The island was plunged into an economic crisis last year and defaulted on billions of dollars of foreign debt, forcing it to reach out to the global financial body for assistance.

Though a deal was struck earlier this year, the IMF decided not to release the second $333mn tranche of a $3bn bail-out fund designated for Sri Lanka following a two week visit to the island last month, stating steps to improve tax and revenue collection had fallen short of their expectations.

This week however, Sri Lanka announced it had reached a preliminary debt restructuring agreement with Exim Bank. According to IMF data, the $4.2bn debt to the bank is the largest single portion of what Sri Lanka owes to China. Sri Lanka’s finance ministry gave no further details on the terms of the agreement.

The BBC reports “Sri Lanka has a total foreign debt of $46.9bn, 52% of which is owed to China, its largest lender”.

The IMF had earlier told Sri Lanka “to increase revenues and signal better governance, it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion”.

Restructuring Colombo’s foreign debt is also a condition of the IMF programme, with Sri Lankan officials travelling to Marrakech this week to meet with IMF and World Bank officials. According to the BBC, negotiations have not gone well and “they have reportedly been struggling to reach a consensus”.

“Japan, India and France say they were not informed of the EXIM deal and have asked to be given the same terms as China in restructuring discussions," the BBC added. “China is known to cut these kinds of deals in secret and keep the details private.”

See more from the BBC here and the Financial Times here. The statement from the IMF last month can be read here 

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