ECONOMYNEXT –Sri Lanka has been moving forward in bilateral debt negotiations by talking to individual creditors despite a clearly defined process for dealing with Paris Club and other creditors, President Ranil Wickremesinghe had said last week.

Sri Lanka was following a ‘debtor led’ strategy by reforming the economy and also aiming at a ‘highly efficient green economy’, which was going to increase financing needs, Wickremesinghe told a financing summit for a New Global Financing Pact in Paris.

“What else helped us was that Sri Lanka had ongoing negotiations with Japan, India and China and separately regarding further trade integration and also regarding some of the development programs for the future,” President Wickremesinghe said. “This assisted our process.”

Sri Lanka was supported by the International Monetary Fund and also India who gave about four billion US dollars in 2022 he said when all other funding dried up.

Sri Lanka’s currency crisis intensified in 2022 after central bank open market operations depleted forex reserves and float (full suspension of convertibility) of the currency failed due to a surrender rule leading to the collapse of the rupee from 200 to 360 to the US dollar.

India had supported Sri Lanka with about four billion US dollars in the worst time, Wickremesinghe said.

Sri Lanka went through a period of ‘reserve graduation’ with the World Bank and Asian Development Bank making the country eligible for concessionary funding.

After a staff level agreement was signed with the IMF there was no clearly defined path to follow in bilateral debt restructuring with some lenders outside the Paris Club, the president said. Ninety percent of the menu options in the IMF program was agreed, he added.

The lack of a clearly defined path was a problem but a ‘common framework’ for middle income countries may also not help, because such efforts tended to move at the pace of the slowest creditor, he said.Under an ‘ad hoc’ arrangement, India and several countries had come to work with the Paris Club and China was an observer.

“We are able to work with the most committed creditors, raising the general quality and efficiency of the process,” Wickremsinghe said. “We are still frustrated by the lack of progress.”

Wickremesinghe said a new debt negotiation framework was needed since geopolitical tensions played a part, which cannot be solved by the debtor countries.

“The mistrust between US and China and the growing tensions has to be address by you all, not merely Sri Lanka and the country concerned,” Wickremsinghe said. “If you do not resolve it, Asia and Africa we will get caught into another situation not of our making. Restructuring is needed. But it has to move fast, otherwise LIC or MIC, the countries will not have much hope.”

A number of countries with highly unstable, depreciating, soft-pegged (flexible exchange rates) who had engaged in inflationary open market operations and covid monetary re-financed funding, are now in the brink of default.

Many of the countries had loaded up of sovereign debt as bond buyers went on a yield seeking spree as reserve currency quantitative easing (money printing) kept interest rates artificially low and China also busted some of its reserves on the Belt and Road project.