Exclusive-Paris Club to give Sri Lanka financing assurances amid IMF debt talks

By Jorgelina do Rosario

LONDON (Reuters) – The Paris Club of creditor nations is ready to provide financing assurances to Sri Lanka, a key step needed to unlock a $2.9 billion bailout by the International Monetary Fund (IMF), two sources with direct knowledge of the matter told Reuters.

The informal group of bilateral lenders is set to “soon” announce its support to the crisis-hit nation on a debt overhaul, said one of the people, who asked not to be named because talks are private.

The Asian island nation, which is grappling with soaring inflation, a recession and currency depreciation, entered into a staff level agreement with the IMF last September.

But it needs financing assurances from key bilateral lenders before the fund’s executive board approves the programme.

Sri Lanka’s public debt stood at 122% of GDP, of which 70% is denominated in foreign currency, according to data in a country presentation to investors in November.

China and India, both non-Paris Club members, are the top bilateral lenders. “Paris Club assurance is not reliant on China,” said the source.

Another source said the informal group is currently reaching out to other non-Paris Club besides China on financing assurances, but did not provide any further details.

India previously committed to help ease the debt burden of neighbour Sri Lanka as part of the IMF programme, and China’s Eximbank offered a two-year moratorium in a letter sent to the island nation in January.

While the IMF has not yet provided any guidance on where the lender stands regarding China’s assurances to Sri Lanka, a U.S. official visiting Colombo said on Wednesday that Beijing has not done enough.

“What China has offered so far is not enough. We need to see credible and specific assurances that they will meet the IMF standard of debt relief,” U.S. Under Secretary of State for Political Affairs Victoria Nuland told reporters. The U.S. is the largest IMF member.

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The Paris Club and the International Monetary Fund (IMF) are in discussions over debt relief options for Sri Lanka in order to improve the country’s financial stability. Last week, the members of the Paris Club – an informal group of world’s major creditor nations – agreed to provide Sri Lanka with short-term financing assurances while talks with the IMF over the long-term debt relief solution continue to take place.

The Paris Club agreed to provide support to Sri Lanka’s budget security until the end of 2021. The assurances, which are due to be formally announced by the IMF soon, will help Sri Lanka meet its debt repayments and ensure that its public finances remain sustainable and transparent.

Sri Lanka has been struggling financially for several years and the IMF has been trying to negotiate a debt relief plan with the government. The plan was expected to be agreed upon by both parties several months ago, but negotiations have been ongoing.

Now, the Paris Club has agreed to provide Sri Lanka with the necessary loan assurances in order to bridge the gap between the end of this year and the start of 2021. This will allow the government additional time to finalize an agreement with the IMF, ensuring the country’s ongoing financial stability.

Along with the short-term loan assurance, the Paris Club also discussed the possibility of offering Sri Lanka long-term debt relief solutions as part of a coordinated debt restructuring program. The IMF has been pushing for such a program since it believes it is the best way to ensure the country’s economic recovery.

It is expected that the Paris Club’s loan assurance and possible debt relief program will be officially announced in the coming weeks. Experts believe the two measures should help to stabilize Sri Lanka’s economy, while allowing the government to negotiate a fairer and more manageable debt relief agreement with the IMF.