Factbox: Sri Lanka set to start talks to restructure $30bn debt

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COLOMBO, Sept 22 (Reuters) – Crisis-hit Sri Lanka will on Friday begin the delicate task of renegotiating its debt with a range of private and bilateral creditors, including China, India and Japan, to restructure and repay nearly $30 billion he owes.

WHY THE NEED TO RESTRUCTURE THE DEBT?

Years of economic mismanagement and the fallout from the COVID-19 pandemic have pushed foreign exchange reserves to record highs in the worst economic crisis in more than seven decades.

Sri Lanka reached a staff-level deal in September for a $2.9 billion bailout from the International Monetary Fund after its central bank declared default on an external debt in April, saying payment was due. “difficult and impossible”. Read more

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But the IMF will only start providing funds after the island nation of 22 million people charts a sustainable repayment path. This in turn requires negotiations with private creditors and bilateral lenders.

The Ministry of Finance and its legal adviser, Clifford Chance, will hold a conference call on Friday with external creditors, to explain the economic difficulties, the debt restructuring plans and the objectives set by the IMF. Read more

WHO ARE THE KEY PLAYERS?

Total foreign currency debt of $38.7 billion amounts to 48.2% of GDP, according to the latest IMF report in March.

This includes $13 billion of international sovereign bonds held largely by private creditors, such as asset managers BlackRock (BLK.N) and Ashmore (ASHM.L).

The informal group of Paris Club creditor countries, which includes India and Japan, holds $4.9 billion of Sri Lanka’s debt, and China about $5 billion more.

WHAT ARE THE POTENTIAL COMPLICATIONS?

Debt crisis veterans cite particularly difficult issues.

Sri Lanka is the first middle-income country to default after the COVID-19 pandemic. It is outside the G20 framework set up to help poor countries deal with defaults. Read more

Estimates of its complex borrowings range from $85 billion to over $100 billion.

Foreign creditors could demand that the government also restructure $48.6 billion of domestic debt, or about 60% of GDP, which could complicate and delay the recovery.

Competing regional powers China, India and Japan also need to find common ground on how to reduce the debt owed to them.

WHAT IS AT STAKE?

If Sri Lanka is unable to put in place its debt restructuring in a timely manner and reach a compact at IMF board level, it will lose additional funding to stabilize and reform its economy on the growth path.

Without a solution, further unrest could threaten, after months of hardship caused by shortages of essential food, fuel and medicine and inflation that soared to 70.2% in August.

Unprecedented street protests forced the resignation of President Gotabaya Rajapaksa after he fled the country in July, allowing veteran politician Ranil Wickremesinghe to take over.

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Reporting by Uditha Jayasinghe; Editing by Clarence Fernandez

Our standards: The Thomson Reuters Trust Principles.

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