The ERD handles the vast majority of Public and Publicly Guaranteed (PPG) debt servicing, except for a few small SOE foreign loans serviced directly by those SOEs. PPG Debt: We rely on data obtained via Right to Information requests from the External Resources Department (ERD) of the Ministry of Finance, Sri Lanka. In reality, when China’s commercial lending to the government and lending to Sri Lankan State-owned Enterprises (SOEs) are considered, using a wider definition called Public and Publicly Guaranteed (PPG) debt, the share rises to 19.9% at the end of 2021 and debt service on that debt stock was 20% of total PPG debt service. But it can still be underestimated due to the use of certain headline numbers, a popular one being that only 10% of Sri Lankan government debt is from China. In this context, China’s lending is much smaller. By the end of 2021, ISBs accounted for 36.5% of total foreign debt in Sri Lanka and ISB repayments accounted for 47% of total foreign debt repayments in the same year. Data shows, however, that the biggest foreign lending source during the last decade was International Sovereign Bonds (ISBs), also referred to as Eurobonds. This belief is often the basis of the Chinese “debt trap” narrative in which Sri Lanka is cited as a victim. First is the common overestimation of China’s contribution to Sri Lanka’s debt buildup. Providing an accurate picture of China’s lending to Sri Lanka involves dispelling a couple of myths. Other Chinese lenders have negligible exposures to the Sri Lankan sovereign. About $4.3 billion of the outstanding payments are owed to EXIM Bank of China (ChEXIM) and $2.8 billion to China Development Bank (CDB), China’s two biggest policy banks. In other words, about 26% of the foreign debt to be restructured are owed to Chinese creditors. Understanding the scale of China’s lending to Sri LankaĪccording to estimates, of the approximately US$26.4 billion in outstanding external foreign currency debt of the public sector by the end of 2021, for which repayments were suspended on 12 April 2022 ( Author approximation based on data from the Central Bank of Sri Lanka and External Resources Department of the Ministry of Finance), about US$7.1 billion was debt from China ( based on data obtained via Right to Information requests from the External Resources Department of the Ministry of Finance, Sri Lanka). Whether and how China chooses to act in the current crisis will shape the process of finalizing external debt restructuring for the island nation. A review of Chinese lending history in the country, particularly its recent offering of direct budgetary financing in 2018 and during the pandemic, also demonstrates China’s understanding of Sri Lanka’s situation and its potential to intervene as a major creditor. For this very reason, China plays a key role in Sri Lanka’s debt restructuring process. While Sri Lanka’s debt obligations to China have often been misinterpreted, the fact remains that China is Sri Lanka’s largest bi-lateral creditor.
Sri Lanka started discussions with the IMF in April, and on May 24 appointed legal and financial advisors for the debt restructuring process. Sri Lanka’s Central Bank Governor, Nandalal Weerasinghe, stressed that Sri Lanka intends to enter into an IMF program and restructure the foreign debt for which repayments were suspended.
On April 12, Sri Lanka announced that due to severe foreign currency shortages, it will suspend foreign debt repayments, except for repayments to multilateral organizations such as the World Bank and the Asian Development Bank (ADB).
Sri Lanka is currently experiencing a foreign currency sovereign debt default for the first time in the country’s post-independent history.
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