China backs Sri Lanka over debt, IMF push

Pledge comes as the island’s Prime Minister Dinesh Gunawardena wraps up five-day visit

China has pledged to continue to support Sri Lanka’s debt restructuring in a joint statement issued as the island’s Prime Minister Dinesh Gunawardena wrapped up a five-day visit.

China would support Sri Lanka’s negotiations with Chinese creditors, it said in the statement released on Friday, though it did not give further details.

Beijing was willing to “continue supporting its financial institutions to actively negotiate with Sri Lanka, maintain friendly communication with other creditors, and play a positive role in the International Monetary Fund to assist Sri Lanka in financial relief”, the statement said.

China is the largest creditor of Sri Lanka, which declared bankruptcy in 2022 and suspended repayments on some US$83 billion in local and foreign loans after it ran out of foreign reserves.

Debt restructuring was top of the agenda for Gunawardena’s visit to China, where he held talks with President Xi Jinping and Premier Li Qiang in Beijing before travelling south to Hainan province to address the Boao Forum.

Colombo is working to maintain an IMF bailout of US$2.9 billion, extended on the condition of debt restructuring with foreign debtors and measures taken to develop the country’s economy.

In October, Sri Lanka said it had reached an agreement with the Export-Import Bank of China to cover about US$4.2 billion of outstanding debt.

However, there was no news about talks with other major Chinese debtors, including the China Development Bank and some Chinese state enterprises.

By the end of 2022, China’s debt stock in Sri Lanka had reached nearly US$7.3 billion, constituting 19.6 per cent of the island’s public external debt.

The figure includes debts by both government-backed banks and state-owned companies, according to a paper by Chulanee Attanayake of the National University of Singapore.

Friday’s statement also said China would continue to support Port City Colombo and the Hambantota Development Project, and envisioned turning them into “flagship projects of the Sino-Sri Lankan joint construction of the ‘Belt and Road [Initiative]’”.

Hambantota and debts owed to China have come under scrutiny after Colombo handed over the strategically important port to a venture led by China Merchants Port Holdings Co in return for US$1.1 billion on a 99-year lease in 2017. The move also irked India, as the port at the southern tip of Sri Lanka is a potential key maritime hub in the Indian Ocean.

The joint statement also said China would encourage more companies to invest in Sri Lanka, while Sri Lanka said it was planning to announce more preferential treatment for Chinese companies to invest in the Colombo and Hambantota.

President Xi highlighted China’s support for the two projects during his meeting with Gunawardena on Wednesday.

China will also increase imports from Sri Lanka, including tea, according to the statement.