The head of the debt-stricken Central Bank of Sri Lanka said on Wednesday that the country is making good progress in talks with its creditors to obtain financial guarantees for debt restructuring, an important step towards finalizing the International Monetary Fund bailout.
Sri Lanka is bankrupt and has suspended repayment of its $51 billion foreign debt, of which $28 billion must be repaid by 2027.
It reached a preliminary agreement with the International Monetary Fund for a rescue package of $2.9 billion over four years. Its completion hinges on assurances of debt restructuring from creditors that include China, India and the Paris Club, a group of major creditor nations.
India announced last week that it had given its assurance to the International Monetary Fund to facilitate the bailout. India has extended $4.4 billion in official credit to Sri Lanka, excluding other forms of lending.
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“Other bilateral creditors, the Paris Club, China and small bilateral creditors are on the way to issue financial guarantees,” said Nandalal Weerasinghe, Governor of Sri Lanka’s Central Bank.
“The process is progressing very well,” Weerasinghe told reporters at his office, saying the country hopes to get “necessary financial guarantees from all our creditors in a very short period.”
Sri Lanka has borrowed heavily from China over the past decade for infrastructure projects that include a seaport, an airport and a city being built on reclaimed land. The projects failed to generate enough revenue to pay for the loans, a factor in Sri Lanka’s economic woes.
China accounts for about 10% of Sri Lanka’s loans after Japan and the Asian Development Bank. However, his agreement to restructure his loans is crucial.
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Sri Lanka’s economic crisis and resulting shortages of food, medicine, fuel and cooking gas sparked riots last year, forcing the president to flee the country and later resign.
Since then, Sri Lanka has shown some signs of progress, with shortages reduced and daily jobs restored. However, power outages continue daily due to fuel shortages and the government is struggling to find funds to pay government employees and perform other administrative tasks.
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It announced this month that it would cut 6% of each ministry’s budgets this year and plans to reduce the size of the army, which has swelled to more than 200,000 personnel due to a prolonged civil war. The government plans to reduce the size of the army by almost half by 2030.