Sri Lanka and a group of its creditors are in final negotiations to suspend debt repayments until 2028, Nikkei has learned, as country creditors including Japan seek to prevent China’s influence from expanding in the debt-ridden island.

“Negotiations [with the creditor nations] have concluded. We are hoping that it [a detailed announcement] will take place in the next few weeks,” Sagala Ratnayaka, Sri Lanka’s national security adviser to the president, told Nikkei in a recent interview. The repayment period will be 15 years, from 2028 to 2042, with the interest rate newly set at around 2%. He said that there will be no further debt reduction, despite a request by the island nation.

Sri Lanka in April 2022 announced a temporary suspension of public external debt payments, in effect putting the country into default. A meeting of creditor nations was set up in April 2023. Japan, which is the largest creditor country after China, is serving as the chair in the talks along with India and France.

Sri Lanka and the creditor nations have reached a basic agreement on a repayment moratorium and a reduction in interest. The provision of financial assistance from the International Monetary Fund, which was conditional on debt restructuring agreements being struck with major creditor countries, has also begun.

China, the biggest creditor, has only joined the meeting as an observer. However, the restructuring of debt from China via loans of the Export-Import Bank of China would be “similar,” Ratnayaka said. “We have a saying which means ‘everyone will be treated equally’,” implying that the terms of debt repayment to China would be similar to those agreed at the creditors’ meeting.

As of the end of 2023, Sri Lanka’s outstanding debt was $37.3 billion, of which China accounted for $4.7 billion.

Sri Lanka handed over control of its southern Hambantota Port to China in 2017. This was seen as a typical example of a “debt trap,” where infrastructure rights are taken away amid delayed debt repayments. Some creditors, including Japan and India, are wary of China expanding its influence into the Indo-Pacific, with Sri Lanka as its base.

Ratnayaka explained that “this is all purely commercial. There is nothing military [about the port agreement]. Sri Lanka is open to investment and we don’t pick and choose on the basis of what country, unless it affects national security.” He added, “But in the north and areas which would affect the security of India, we are conscious.”

Source: Nikkei Asia
--Agencies