Sri Lanka’s IMF Bailout Hangs in Balance as China Refuses to Restructure Loans

Tuesday's report from New Delhi indicated that the much-anticipated $330 million bailout loan for Sri Lanka by the International Monetary Fund (IMF) remains uncertain due to Beijing's refusal to restructure its bilateral loans to the island nation. The IMF has stressed the necessity of assurances from Sri Lanka's largest bilateral lenders - China, Japan, and India - that they will restructure their loans before any possible IMF funding.

Despite numerous requests, Beijing has not provided a "concrete debt relief framework," according to a report in Nikkei Asia. This reluctance could impact Sri Lanka's IMF bailout plans as China holds 42% of the island nation's external debt.

A Daily FT report suggests that Sri Lanka is likely to reach a debt reduction agreement with India, Japan, and France this month, in time for IMF and World Bank meetings in Morocco. However, China has remained an observer and has not joined this group.

An IMF delegation recently spent two weeks in Sri Lanka reviewing its economic progress since the financial collapse in 2021. The delegation noted that the country has made commendable progress in implementing reforms and stabilizing the economy while curbing inflation.

Meanwhile, Sri Lankan President Ranil Wickremesinghe's government is dealing with another issue concerning China. Last week, Sri Lankan Foreign Minister Ali Sabry stated that Colombo had not given permission for Chinese research ship Shi Yan 6 to enter the country due to Indian security concerns.

The presence of Chinese ships in Sri Lanka's ports has raised concerns not only for India but also for the US. This issue was discussed by US Under Secretary Victoria Nuland with Sabry during the UN General Assembly session in New York last month.

In related news, a report released on Tuesday by the World Bank suggested Pakistan undertake fiscal reforms, such as reducing tax exemptions and broadening the tax base, for economic stability and sustainable growth. The report noted that Pakistan's economy slowed significantly in FY23, with real Gross Domestic Product (GDP) estimated to have contracted by 0.6%.

The World Bank warned that without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan's economy would remain vulnerable to domestic and external shocks. It also projected that real GDP growth would recover to 1.7% in FY24 and 2.4% in FY25, assuming robust implementation of the IMF Stand-By Arrangement (SBA), new external financing, and continued fiscal restraint.

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