In Sri Lanka’s attempt to restructure foreign debt, India and China are crucial

India and China will have a crucial role in the success of Sri Lanka’s efforts to convene a meeting of creditors to restructure their debt in order to cope with an unprecedented economic crisis, people familiar with the matter said.

Sri Lanka turned to Japan to help organise the meeting of what is being described as a “coordinating platform” to reduce debt payments and restructure repayment deadlines. Japan, in turn, has conveyed to Sri Lanka certain conditions, including the presence of India and China at the meeting in view of their key role among creditors, the people said.

In the normal course, such a meeting would have involved members of the Paris Club, an informal group of officials from 22 major creditor countries that helps find sustainable solutions to payment problems faced by debtor nations. Japan is a member of the Paris Club, while India and China aren’t part of the group.

“The involvement of India and China in the proposed meeting is crucial, in view of their role in the region and the amount of Sri Lanka’s debt held by them,” one of the people cited above said.

The Japanese side, which is reluctant to go ahead with the meeting without the presence of India and China, has indicated that all debt restructuring should be done through the coordinating platform and there shouldn’t be any bilateral arrangements between Sri Lanka and creditor countries, the people said.

The Sri Lankan and Indian sides have been in touch through diplomatic channels about the proposed meeting, and India has also presented some queries to Colombo.

When Sri Lanka earlier this year was hit by its worst economic crisis since independence, India extended emergency assistance worth $3.8 billion, including lines of credit for emergency purchases of food, medicines and fuel, a currency swap and deferral of loan repayments. This was more than any other country in the region, including China.

Sri Lankan President Ranil Wickremesinghe sought Japan’s help to organise the meeting of creditors when he met Prime Minister Fumio Kishida during a visit to Tokyo last month to attend the funeral of former premier Shinzo Abe.

India highlighted the need for structural reforms, creditor equitability and transparency in Sri Lanka after the International Monetary Fund (IMF) announced a bailout package of about $2.9 billion for the island nation last month.

China tops the list of Sri Lanka’s creditors, holding about 10% of the total of international debt at $7.3 billion, including financing from the Asian Infrastructure Investment Bank and the Export-Import Bank of China. Japan holds $2.7 billion and India $1.7 billion. According to the Sri Lankan government, the country’s external debt at the end of June was $46.6 billion, or almost 70% of their gross domestic product (GDP).