Sri Lanka’s central bank urges China and India to reduce its debts

China and India have been requested by the central bank of Sri Lanka to write off their debts as quickly as possible.

The insolvent Indian Ocean nation missed debt payments and agreed to a $2.9 billion (£2.4 billion) bailout.

However, the International Monetary Fund would not disburse the funds until China and India consented to lower Sri Lanka’s enormous debt.

The central bank governor of Sri Lanka said that prompt action was in everyone’s best interests.

Although the country’s inflation rate has slightly decreased since last year, food prices in Sri Lanka last month were still 65% higher than they were a year ago.

More than a third of Sri Lanka’s population, or 8 million people, is estimated by the World Food Programme to be living in “food insecurity,” with hunger concentrated primarily in rural areas.

The former president left the country in July of last year as a result of the widespread protests caused by the economic unrest.

According to projections from the World Bank, Sri Lanka’s economy shrank by 9.2% in 2022 and will shrink by a further 4.2% this year.

Beijing has lent Sri Lanka over $7 billion, while it owes India about $1 billion.

By the end of 2022, the Sri Lankan government had previously anticipated reaching an agreement on a new payment schedule with China and India.

However, if India and China do ultimately decide to reduce their loans to Sri Lanka, a new potential issue in the form of private creditors, who make up 40% of the nation’s external debt stock, could arise.

Some American hedge funds refused to accept a restructuring of the sovereign bonds they had purchased on the open market in the years following Argentina’s economic collapse and default in 2001. Instead, they demanded full repayment and sued the government of the country in the US to get it.

When asked about private bondholders in Sri Lanka, Mr. Weerasinghe, the country’s governor, responded, “We negotiate in good faith with private creditors.” And from what we can tell, they are open to interacting with us and are extremely positive.”

He stated that he anticipated that the IMF monies may be distributed to Sri Lanka in “four to six weeks” following consent from bilateral creditors.