United States Agency for International Development (USAID) chief Samantha Power

Colombo: A United States diplomat asked China to cooperate with Sri Lanka's debt restructuring and advised the island nation to be responsible for future borrowings while agreeing to participate in the re-structuring of Sri Lanka's debt.

As per the local media, Economy Next, United States Agency for International Development (USAID) chief Samantha Power, who was recently on a two-day visit to Colombo, said, "China should co-operate with Sri Lanka's debt re-structuring while the country should engage in responsible borrowings in the future."

"As Sri Lanka seeks to emerge from this economic crisis, the US as a creditor and a member of the Paris club stands ready to participate in the re-structuring of Sri Lanka's debt," She added.

The deepening economic crisis of Sri Lanka has put the country in a bad shape after its foreign reserves ran out following two years of money printing and defaulted in April 2022. The rupee collapsed from 180 to 360 to the US dollar in the worst crisis in the history of the island's intermediate regime central bank. The island nation is now trying to restructure its debt before International Monetary Fund starts disbursing the loan.

She said that all the Sri Lankan creditors, including China, have to agree to restructure their existing loans to the island nation before the IMF starts disbursing the loan, Economy Next reported.

"It is imperative that all of Sri Lanka's creditors, most notably the People's Republic of China, co-operate in this process openly and on comparable terms with each other. When debt becomes unsustainable as it so clearly has in Sri Lanka, the stakes of that cooperation can mean the difference between life or death or prosperity or poverty," Power said.

The US diplomat further said that the details of the debt restructuring will be handled by the US Treasury but Sri Lanka had to change the way it borrowed. "I think what we have seen is not only the restructuring of debt but also of changing habits that gave rise to the accumulation of that debt in the first place," she added.

She said bureaucratic reforms and attempts to make Sri Lanka more export competitive mattered.

China's lending to Sri Lanka, some of which was done for so-called white elephants has drawn criticism. It is estimated that Sri Lanka owes debt payments of USD 2 billion this year to China, one of Sri Lanka's biggest creditors.

However, others have also pointed out that monetary instability played a key role in the accumulation of debt as the country lost the ability to repay foreign debt with current inflows in 2015, 2016, 2018, 2020 and 2021, resorting to 'bridging finance' style external borrowings.

Sri Lanka's commercial debt rose from 5.0 billion dollars to 14 billion from 2014 to 2020 as the country experienced two currency crises and net foreign debt after reserves went up from around 17 billion dollars to 28 billion dollars not counting borrowings by the Ceylon Petroleum Corporation.

A senior International Monetary Fund (IMF) official said that Sri Lanka's ongoing economic crisis would deepen if China disagrees on debt restructuring. He said that China would not go along with Western creditors on debt restructuring on an equal footing.

Notably, China has so far not agreed to debt restructuring which could include haircuts or reductions in interest rates. Instead, China has expressed its willingness to refinance Sri Lanka to repay its past loans without any changes, said Lankan officials, reported Sunday Islands Online.

Earlier, after a meeting with IMF delegates, Sri Lankan President Ranil Wickremesinghe requested China to restructure its debt amid a severe economic crisis and shrinking foreign reserves, but Beijing has chosen to maintain a deafening silence which reveals how disinterested the country is to extend a helping hand to the island nation at this need of the hour.

The meeting with the Head of State came after the delegates of the global lender kicked off discussions with Dr Weerasinghe in the morning, to finalise a staff-level agreement for a possible USD 3 billion bailout package, including restructuring debt of about USD 29 billion.

An International Monetary Fund (IMF) statement on the eve of its visit highlighted, albeit obliquely, that the China factor is set to shape Sri Lanka's economic fortunes. On the prospects of giving Sri Lanka a multibillion-dollar bailout, the fund said, "Because Sri Lanka's public debt is assessed as unsustainable, approval by the IMF Executive Board of the Extended Fund Facility programme would require adequate assurances by Sri Lanka's creditors that debt sustainability will be restored."