Sri Lanka’s IMF deal draws closer as China backs debt restructuring

China has agreed to support Sri Lanka’s debt restructuring, a crucial step in securing a $2.9 billion IMF bailout and lifting the country out of an economic crisis.

The fund’s Asia-Pacific director, Krishna Srinivasan, confirmed Beijing’s move on Tuesday, saying it “paves the way” for the IMF’s board to consider completing the assistance program at a March 20 meeting.

The IMF package has been pending for months as Sri Lanka tried to persuade its creditors to agree to a plan to restructure the bankrupt country’s external debt, a condition for the funds to be released.

“Sri Lanka has now received funding commitments from all major bilateral creditors,” Srinivasan said. China’s deal follows similar commitments from creditors, including India and Japan, in January.

Sri Lanka’s President Ranil Wickremesinghe told parliament earlier Tuesday that his government had received a letter of support from China’s Eximbank.

“Our part of the commitment is now complete and we hope the IMF will do its duty,” Wickremesinghe said, adding that the IMF’s bailout would free up more funding from the World Bank and the Asian Development Bank.

Srinivasan said the IMF package would “support the authorities’ program of ambitious reforms [the country has] already started which will help Sri Lanka emerge from its current crisis and put it on a path of strong and inclusive growth”.

Eximbank forwarded requests for comment on earlier statements by the Chinese Foreign Ministry. Beijing had previously offered a two-year moratorium on debt and interest repayments from Sri Lanka, a condition the IMF officials said did not support.

Policymakers have been closely watching Sri Lanka’s efforts to win the approval of Beijing, whose prominence as a global lender has risen sharply over the past decade.

Sri Lanka last year became the first Asia-Pacific country to default in two decades as low foreign exchange reserves led to serious shortages of essential imports such as food, fuel and medicines.

The crisis has set Sri Lanka as a cautionary tale about economic mismanagement and the dangers that high inflation and commodity price shocks pose to developing countries. In July, the island’s former president, Gotabaya Rajapaksa, fled the country and resigned after months of mass street protests.

Sri Lanka owes around $40 billion in government debt to creditors such as China, India and Japan, as well as private bondholders.

It reached a tentative “staff-level” deal with the IMF in September and imposed a series of unpopular measures to meet the lender’s demands, including raising taxes and utility prices and cutting subsidies.

The US has in recent months slammed China for allegedly slowing down debt restructuring in Sri Lanka and Zambia, and accused Beijing of exacerbating economic woes.

During a visit to India last month, US Treasury Secretary Janet Yellen said China needs to be “constructive” and “get together around the table” on debt negotiations.

Sri Lanka has launched more than half a dozen IMF programs in the past, but many have not been completed. Wickremesinghe warned that the country must meet the lender’s demands in order to regain its credibility.

“All of their conditions must be met,” he said, “or else they will stop working with us.”

Additional reporting by Cheng Leng in Hong Kong