IMF team holds talks with crisis-hit Sri Lanka on debt restructuring

COLOMBO/LONDON — An International Monetary Fund (IMF) team met Sri Lanka's president on Wednesday for talks on a bailout, including restructuring debt of about $29 billion, amid the nation's worst financial crisis in more than seven decades.

The second such visit in three months comes as the Indian Ocean island scrambles to lock down a staff-level pact for a possible $3 billion program.

"It was further decided to hold another round of discussions on Friday, and to discuss technical issues with the officials of the Central Bank in the future," the President's Office said.

The main sticking point is how to find a sustainable track for Sri Lanka's unwieldy debt, which stood at 114% of GDP at the end of last year.

Sri Lanka has $9.6 billion in bilateral debt and its private credit, which includes international sovereign bonds, stands at $19.8 billion, finance ministry data show.

Japan and China are the largest holders of bilateral debt, with the latter accounting for about $3.5 billion. Overall, when commercial debt is added, China holds about a fifth of Sri Lanka's debt portfolio.

"The issue will be how Chinese and domestic debt will be included in the talks," said Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management.

"Other bilateral creditors won’t be willing to allow China to get away with not having comparable treatment this time. China is part of the problem, and needs to be part of the solution this time."

For months the population of 22 million has struggled with soaring inflation, economic contraction and a severe shortage of essential items of food, fuel and medicine caused by a record slump in foreign reserves.

The most severe financial crisis since independence from Britain in 1948 stemmed from the combined impact of the COVID-19 pandemic and economic mismanagement.

In July, then-president Gotabaya Rajapaksa fled the country and resigned after a mass uprising triggered by what many Sri Lankans saw as his mishandling of the crisis.

President Ranil Wickremesinghe, who is also the finance minister, plans to ask Japan to lead talks on bilateral debt restructuring after Sri Lanka secures IMF support.

The government is "negotiating on many fronts, and it has to make progress at least with the big creditors" for debt talks to move forward, said Sergi Lanau, deputy chief economist at the Institute of International Finance. — Reuters