Sri Lanka reaches agreement with India, Paris Club on debt treatment

The consortium of lenders to Sri Lanka expresses an anticipation of transparency from "other bilateral creditors," with an implicit reference to China.

Sri Lanka's Debt Default and IMF Recovery Package

• In response to last year's economic crisis, Sri Lanka defaulted on its nearly $51 billion foreign debt.
• A comprehensive debt restructuring plan became imperative to kickstart an economic recovery program backed by the International Monetary Fund (IMF).

Key Agreements with Official Creditors

• Sri Lanka has reached an "agreement in principle" with India, Japan, and the Paris Club group of creditors, setting the stage for a debt treatment plan.
• The Official Creditor Committee (OCC), co-chaired by India, Japan, and France, played a pivotal role in formulating the agreement.
• The OCC and Sri Lanka aligned the debt treatment parameters with those of the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF.

Next Steps and Transparency Expectations

• The OCC anticipates formalizing the agreement in the coming weeks through a Memorandum of Understanding with Sri Lanka.
• Japan and India, major lenders, emphasize the importance of creditor parity and transparency, expecting other bilateral creditors to share necessary information transparently.
• Sri Lanka is urged to continue engagement with private creditors to secure favorable terms, aligning with the OCC's conditions.

IMF's Stance and Contingencies

• The IMF, after reaching a staff-level agreement with Sri Lanka, views securing an agreement with official creditors as the critical next step for the next tranche of the IMF package.
• China, Sri Lanka's largest bilateral creditor, has assured cooperation in the debt restructuring process, with specifics of the plan eagerly awaited.

Sri Lanka’s Economic Crisis and Its Background –

Reasons for Balance of Payments crisis surfaced in Sri Lanka in 2022-

• Sri Lanka’s economy and its foreign currency revenue to large extend depends on tourism, which has received a severe beating in the recent times.
• The 2019 serial blast in Sri Lanka had caused decline in the arrival of foreign tourist in the country.
• Global pandemic of Corona has further decimated the tourism industry.
• The pandemic also did not allow Sri Lankan labourer to travel outside the country were they are employed (mostly gulf countries), thus impacting the foreign currency earned by Sri Lanka through the way of remittances.

What did the Government of Sri Lanka did to overcome the crisis-

• China had promised loan of 1 billion dollars and a credit line of 5 billion dollars.
• Sri Lanka succeeded in receiving line of credit worth 1 billion dollars from the Indian Government.

• The Central Bank of Sri Lanka received aid from the International Monetary Fund (IMF) as its assistance with conditionality.

Sri Lanka and its Strategic significance:

• Strategic Location: Sri Lanka occupies a geo-strategically important position as about two-thirds of the world’s oil and half of the world’s container transportation passes through the south of Sri Lanka.
  • Therefore, Sri Lanka, which is strategically located, stands out in terms of the security of maritime communication and trade lines in the Indian Ocean.
• Positioned as an Island Nation: On the other hand, Sri Lanka is home to ports that have the potential to become important maritime hubs in the Indian Ocean.
• Economic Crisis: The crisis that is hampering Sri Lanka’s economic and political stability could have serious repercussions on India.
  • Because Sri Lanka’s economic and therefore political dependence on China has led to an increase in Chinese influence in the country.

India’s stance with Sri Lanka:

• Sri Lanka has an important place in both India's 'Neighbourhood First' policy and 'SAGAR' vision.
• India wants to expand the scope of digital payments between both the countries, bringing the use of UPI and similar tools to the forefront.