Sri Lanka likely to secure six-year moratorium, lower interest on debt owed to India, Paris Club

Sri Lanka likely to secure six-year moratorium, lower interest on debt owed to India, Paris Club

Subject: IR

Section: Int organisation

Context: Sri Lanka is close to finalising a debt treatment plan with India and the Paris Club, sources familiar with the negotiations said, pointing to a likely moratorium of up to six years and a reduced interest rate during the repayment period

Understanding the Paris Club

• The Paris Club is a group of mostly western creditor countries that emerged from a 1956 meeting where Argentina agreed to meet its public creditors in Paris.
• It serves as a forum where official creditors meet to address payment difficulties faced by debtor countries.
• Objective: To find sustainable debt-relief solutions for nations struggling to repay bilateral loans.
• Members:
  • Includes countries such as Australia, Canada, France, Germany, Japan, the United States, and others.
  • All 22 members belong to the Organisation for Economic Co-operation and Development (OECD).
• Debt Agreements:
  • The Paris Club has reached 478 agreements with 102 debtor countries since its inception.
  • Total debt treated under these agreements is USD 614 billion since 1956.

Recent Developments and Sri Lanka’s Debt Scenario

• Changing Landscape:
  • Paris Club countries were dominant in bilateral lending in the past century.
  • However, their significance has diminished in the last two decades with China emerging as the largest bilateral lender globally.
• Sri Lanka’s Bilateral Creditors:
  • In Sri Lanka’s case, the largest bilateral creditors include India, China, and Japan.
  • Sri Lanka owes 52% of its bilateral debt to China, 19.5% to Japan, and 12% to India.

Further developments

Meanwhile, Sri Lanka got astep closer to receiving thenext instalment of the InternationalMonetary Fund’s assistance,as part of the $3 billionpackage it obtained last year, to recover from the unprecedentedfinancial crash witnessedin the island nation in2022. Authorities reached astate-level agreement with theFund on the second review ofits four-year Extended FundFacility (EFF) arrangement.Upon completion of the IMFExecutive Board’s review, SriLanka would have access to

about $337 million, takingIMF assistance it has receivedso far to $1 billion, the Fundsaid in a statement.

About Extended Fund Facility (EFF):

• It is a fund created by IMF for helping economies to address serious medium-term balance of payments problems because of structural weaknesses that require time to address.
• Assistance under an extended arrangement features longer program engagement to help countries implement medium-term structural reforms with a longer repayment period.
• It provides for support for comprehensive programs including the policies needed to correct structural imbalances over an extended period.
• Typically approved for periods of three years, but may be approved for periods as long as 4 years (repaid over 4.5–10 years in 12 equal semiannual installments unlike Stand-By Agreement facility which provides support for short period with repayment period of 3.5–5 years.)

Conditions to get help

• When a country borrows from the IMF, it commits to undertake policies to overcome economic and structural problems
• The IMF’s Executive Board regularly assesses program performance and can adjust the program to adapt to economic developments.
• Lending is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is linked to the Fund’s Special Drawing Rights (SDR) interest rate.
• EFF is guided by a country’s financing needs, capacity to repay, and track record with past use of IMF resources:
• Normal access: Borrowing under an EFF is subject to the normal limit of 145 percent annually of a country’s IMF quota, (IMF quota broadly reflects a country’s position in the global economy), and a cumulative limit over the life of the program of 435 percent of its quota, net of scheduled repayments.
• Exceptional access: The Fund may lend amounts exceeding these limits in exceptional circumstances provided that a country satisfies a predetermined set of criteria.