Sri Lanka’s economy sank into one of the deepest recessions since the country’s independence in 1948. With around $35 billion in foreign debt, Sri Lanka is the first government in the Asia-Pacific region to default on its international obligations since Pakistan in 1999. 

According to government statistics Sri Lanka owes at least $5 billion to China. India has also lent $3.8 billion, Japan is owed at least $3.5 billion, and another $1 billion is due to other rich countries.

The country is seeking an International Monetary Fund (IMF) bailout. On September 1, the IMF struck a deal to provide $2.9 billion over four years to help salvage the country but reiterated that much will depend on the cooperation of the country’s existing creditors including China.

Reuters reported, on Tuesday, September 13, Investment bank Lazard started working with India, China, and Japan on Sri Lanka’s debt restructuring.  

Government sources said the bank would formally meet with private creditors, who hold about $12 billion in bonds, this weekend.

According to Samantha Power, USAID administrator, Sri Lanka seeks to emerge from its economic crisis. The U.S., as a creditor and as a member of the Paris Club, stands ready to participate in restructuring Sri Lanka’s debt. Power urged China to assist Sri Lanka, “It is imperative that all Sri Lankan creditors, most notably the People’s Republic of China, cooperate in this process openly and on comfortable terms with each other.”

The Chinese regime plays an increasing role as a global creditor, offering significant loans to developing countries, which often involve higher financing costs and “debt-trap diplomacy.” 
According to The Washington Post, China’s domestic politics may limit its freedom to maneuver. Chinese economic decision-makers disagree over whether they should participate in multilateral financial institutions and debt restructuring, and whether they should take losses on outstanding loans. China’s central bank and finance ministries have mainly supported debt relief efforts, but the policy banks want to avoid writing down debts and taking losses.

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