Under the IMF deal, Pakistan has agreed to increase tax revenues through measures of 1 and a half per cent of GDP in FY25 and three per cent of GDP over the programme.

Pakistan and the International Monetary Fund (IMF) have agreed on a $7 billion aid package spread over more than three years to help the cash-strapped country deal with its chronic economic issues.

“Building on the economic stability achieved under the 2023 Stand-by Arrangement (SBA), IMF staff and the Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion,” the global lender said in an overnight statement, confirming the much-awaited deal subject to the approval by the IMF’s Executive Board.

The Washington-based lender further said the new programme aims to support the authorities’ efforts to cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth in the cash-strapped country.

“This includes steps to strengthen fiscal and monetary policy and reforms to broaden the tax base, improve State Owned Enterprises’ (SOE) management, strengthen competition, secure a level playing field for investment, enhance human capital, and scale up social protection through increased generosity and coverage in the Benazir Income Support Programme (BISP),” it read.

The International Monetary Fund also stated that continued strong financial support from Pakistan’s development and bilateral partners would be critical for the programme to achieve its objectives.

An IMF team led by Nathan Porter, IMF’s Mission Chief to Pakistan, held discussions with the Pakistani side during the May 13-23, 2024, staff visit to Islamabad.

According to the statement, the new programme aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector-led growth.

About 10 million people at risk of slipping into poverty in Pakistan: World Bank

Under the deal, Pakistan has agreed to increase tax revenues through measures of 1 and a half per cent of GDP in FY25 and three per cent of GDP over the programme.

“Revenue collections will be supported by simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system,” it said.

The statement said the federal and provincial governments agreed to re-balance spending activities, and at the same time, the provinces will take steps to increase their tax-collection efforts, including in sales tax on services and agricultural income tax.

The latest agreement is the country’s latest turn to the global lender for help in propping up its economy and dealing with its debts through big bailouts. Earlier this year, the IMF approved the immediate release of the final $1.1 billion tranche of a $3 billion bailout to Pakistan.

Finance Minister Muhammad Aurangzeb said the government planned to seek a long-term loan to help stabilise the economy after the end of that bailout package.

The deal was announced just two weeks after Pakistan approved a tax-laden budget for the 2024-25 fiscal year with the approval of the IMF.

Analysts said the new budget of about $68 billion — up from $50 billion in the last fiscal year — was aimed at qualifying for a long-term IMF loan of $6 billion to $8 billion to help stabilise the economy. Pakistan in 2023 nearly defaulted on the payment of foreign debts.

Kenya’s President William Ruto. The ballooning debt in East Africa’s economic hub of Kenya is expected to grow even more after deadly protests forced the rejection of a finance bill that President William Ruto said was needed to raise revenue.
| Photo Credit: AP

The ballooning debt in East Africa’s economic hub of Kenya is expected to grow even more after deadly protests forced the rejection of a finance bill that President William Ruto said was needed to raise revenue. He now warns “it will have huge consequences.”

Facing public calls to resign, Mr. Ruto has said the government will turn to slashing a $2.7 billion budget deficit by half and borrowing the rest, without saying from where.

After anger over the bloated bureaucracy and luxurious lives of senior officials helped to fuel the protests, Mr. Ruto also has promised funding cuts in his own office and said the funding would stop for the offices of the first lady, the “second lady” — the wife of the Vice President — and the wife of the prime Cabinet secretary. Almost four dozen state enterprises with overlapping roles will be closed.

Mr. Ruto has become deeply unpopular in his two years in office over his quest to introduce taxes meant to enable Kenya to repay its $80 billion public debt to lenders including the World Bank, the International Monetary Fund and China.

The public debt makes up about 70% of Kenya’s gross domestic product, the highest in 20 years.

How Mr. Ruto’s administration will find the money to pay off debt without further angering millions of Kenyans barely getting by, and without slowing down the economy, is the key question. The economy grew 5.6% in 2023.

Economist Mbui Wagacha, a former adviser to previous President Uhuru Kenyatta, said Kenya needs a professional budget and management body like the Office of Management and Budget in the U.S. Currently, Kenya’s treasury makes budget estimates and forwards them to the parliamentary finance committee, which creates the finance bills.

“Parliament has abdicated its mandate on the public finances in the Constitution and it’s looking after its own interests,” Mr. Wagacha said in an interview.

He said further borrowing by Kenya could be “disastrous” and proposed a strategy of using diplomacy to attract investment and restructuring the debt in an attempt to get creditors to write off some of it.

Another economist, Ken Gichinga, agreed that government borrowing will slow down Kenya’s economy. Businesses still haven’t recovered from the effects of the COVID pandemic and the war in Ukraine, he said.

“When the government borrows more, interest rates go up. And when interest rates go up, businesses slow down, the economy slows down, due to the high cost of repayment,” Gichinga said.

Kenya’s President has advocated self-sustainability, saying the country should raise more revenue instead of borrowing. “If we are a serious state, we must be able to enhance our taxes,” he said in May.

But Kenyans have rejected attempts to raise taxes as they struggle with rising prices on basic goods, even storming parliament during the recent protests.

Last week, days after announcing he would not sign the finance bill he once championed, Mr. Ruto said he had worked hard “to pull Kenya out of a debt trap” and that huge consequences lie ahead.

Mr. Wagacha said economic growth must come before the government increases revenue targets and tax collection.

“You create an expanded economy with employment and with investment, and people have money in their pockets. It’s much easier for them to hear about your request for taxes,” he said.

He suggested making access to low-interest credit easier for businesses in key sectors like tourism and agriculture, saying small businesses hold the key to Kenya’s economic growth as they tend to absorb many employees. That could help address high youth unemployment.

The government should incentivize businesses to create jobs with low taxation and lower interest rates, Mr. Gichinga said: “At the end of the day, we need a jobs-centred economic policy. That’s what we’ve been lacking.”

The IMF, which had suggested some of the controversial tax changes, has been a target of Kenya’s public dissatisfaction. Some protesters had posters with messages such as “IMF stop colonialism.”

In a statement late last month, the IMF said it was monitoring the situation in Kenya, adding that its main goal was to help it “overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people.”

The IMF needs to do more for Kenya beyond focusing on debt sustainability and be a “strong development partner,” Mr. Gichinga said.

Sri Lanka State Minister of Finance Asanka Shehan Semasinghe.
| Photo Credit: EMMANUAL YOGINI

Sri Lanka has reached a debt restructuring deal with the international sovereign bondholders after protracted negotiations, state Finance Minister Shehan Semasingher said on July 4, calling it a “crucial step” in the cash-strapped country’s efforts to restore debt sustainability.

In a statement, State Minister of Finance Mr. Semasinghe said that an agreement on restructuring terms was reached on July 3, completing Sri Lanka’s debt restructuring process.

“ISBs (International Sovereign Bonds) account for $12.5 billion out of the total external debt of $37 billion. This agreement is a crucial step in our efforts to restore debt sustainability,” Mr. Semasinghe said.

He added that the agreement with private bondholders was subject to the approval by the official creditor committee of nations, including India.

“This marks another key milestone in our journey towards economic revival and strengthening,” he said.

Officials said the expected haircut agreed upon would amount to 28%, with an upfront payment to ISB holders commencing from September this year.

Officials said this completes Sri Lanka’s debt restructuring process, which came as a prerequisite for debt sustainability in the ongoing International Monetary Fund (IMF) bailout of $2.9 billion extended in March 2023 over a period of four years.

It follows the finalisation of debt restructuring agreements with bilateral lenders, including India and China, in Paris on June 26, which President Ranil Wickremesinghe described as a “significant milestone” for bolstering international trust in the debt-ridden economy.

Sri Lanka declared its first-ever sovereign default in mid-April 2022, having run out of its foreign exchange reserves. The halt to the debt services meant that the multilateral creditor nations and commercial lenders could not extend fresh financing to the country.

The government faced criticism from the main Opposition after last week’s announcement on bilateral debt restructuring, who claimed that the government had failed to achieve the best solution for the country.

Dismissing the Opposition’s criticism of debt restructuring as “inaccurate,” President Wickremesinghe, also the finance minister, said, “No bilateral creditor would agree to a reduction of principal amount. Instead, concessions are allowed through extended repayment periods, grace periods and lower interest rates.” A two-day parliamentary debate was postponed as the Opposition demanded agreements to be furnished.

Mr. Wickremesinghe said he would submit all agreements and documents regarding debt restructuring to a Parliament committee upon reaching a deal with the private bondholders.

Pakistan president Asif Ali Zardari
| Photo Credit: PTI

Pakistan President Asif Ali Zardari on June 30 gave his assent to the government’s tax-heavy Finance Bill 2024, which drew sharp criticism from the Opposition which labelled it as an IMF-driven document that was harmful to the public for the new fiscal year, according to a media report.

Finance Minister Muhammad Aurangzeb presented the Budget in the National Assembly on June 12, drawing sharp criticism from the opposition parties, especially jailed former premier Imran Khan’s Pakistan Tehreek-e-Insaf (PTI), as well as coalition ally Pakistan Peoples Party led by former foreign minister Bilawal Bhutto-Zardari.

On June 28, Parliament passed the Pakistani Rs 18,877 billion Budget for the fiscal year 2024-25, detailing the expenditures and income of the government.

The Opposition parties, mainly parliamentarians backed by currently incarcerated former premier Khan, had rejected the Budget, saying it would be highly inflationary.

During the National Assembly session, opposition lawmakers criticised the Budget, asserting that it was now an open secret that the document was dictated by the International Monetary Fund (IMF). Leader of the Opposition Omar Ayub Khan had denounced the budget as “economic terrorism against the people”.

Earlier this week, the PPP — which had initially boycotted the debate over the Budget — decided that it would vote for the finance bill despite certain reservations.

On Friday, the National Assembly passed the budget with some amendments. The motion was preceded by fiery speeches from the opposition, who described the budget as unrealistic, anti-people, anti-industry, and anti-agriculture, the Dawn newspaper reported.

President Zardari on Sunday gave assent to the bill in accordance with Article 75 of the Constitution, the media wing of the President House said, adding that the bill would be applicable from July 1. Under Article 75 (1), the president has no power to reject or object to the finance bill, which is considered to be a money bill as per the Constitution.

On June 28, the Government extended exemptions in specific sectors while announcing new tax measures in several areas to generate additional revenue in the coming fiscal year to meet the International Monetary Fund’s criteria.

Pakistan is in talks with the IMF for a loan of $6 billion to USD 8 billion, the report said. Earlier this week, PM Shehbaz confirmed that the budget was prepared in collaboration with the IMF.

Amendments include introducing a capital value tax on property in Islamabad, implementing new tax measures on builders and developers and increasing the Petroleum Development Levy (PDL) on diesel and petrol by Pakistani Rs 10 instead of the proposed Pakistani Rs 20.

According to the budget documents, the gross revenue receipts have been estimated at Pakistani Rs 17,815 billion, including Pakistani Rs 12,970 billion in tax revenues and Pakistani Rs 4,845 billion in non-tax revenue.

The share of provinces in the federal receipts will be Pakistani Rs 7,438 billion. The growth target had been set at 3.6% during the next fiscal year. Inflation is expected to be 12%, budget deficit 5.9% of GDP and primary surplus will be one per cent of the GDP.

Representational image only.
| Photo Credit: AFP

Pakistan has decided to seek a rollover of around $12 billion debt from key allies such as China in the 2024-25 fiscal year to meet a whopping $23 billion worth of gap in its external financing as the federal government aims to achieve budget targets before the expected arrival of an IMF team to the cash-strapped country.

According to the Finance Ministry insiders, $5 billion from Saudi Arabia, $3 billion from the UAE and $4 billion from China will be rolled over, adding that the estimate of further new financing from China would also be included in the next financial year’s budget, The Express Tribune newspaper reported.

Pakistan will receive more than $1 billion from the International Monetary Fund (IMF) under the fresh loan programme, whereas new financing from the World Bank and Asian Development Bank has also been included in the estimated budget.

According to the Finance Ministry sources, new loan programme agreements will be made with financial institutions. The federal government aims to achieve budget targets before the anticipated arrival of the IMF review mission in Pakistan.

Negotiations for a new loan programme with the global lender are expected to commence in mid-May ahead of the budget which will be presented in June. The Finance Ministry sources said the Ministries had been instructed to complete the targets before the negotiations on the new loan programme.

They added that the details would be given to the IMF delegation when all the important targets were met. It has also been decided to have the budget strategy paper approved by the federal Cabinet before the IMF review mission arrives in the country.

According to the sources, the Finance Ministry has started preparing the budget to set the targets for debt repayment, defence budget and tax collections. Besides, the development and ongoing budget targets will also be determined, according to the paper.

Pakistan has been suffering the chronic ailment of how to meet external liabilities. Traditionally, it depended on remittances, export proceeds and foreign loans to meet its liabilities. But exports haven’t increased to match the imports and avenues of foreign aid have gradually dried up, putting pressure on the Rupee and essential imports.

Last year, it narrowly avoided default due to a timely short-term loan agreement with the International Monetary Fund which provided $3 billion during nine months. The country is once again looking towards the global lender to provide a fresh loan to keep it moving.

In the trying economic conditions, Pakistan has been heavily supported by the remittances its workers living and working around the globe send. The country received the second-highest remittances of the ongoing 2023-24 fiscal at $2.8 billion in April 2024.

According to the State Bank of Pakistan (SBP), the remittances increased by 3.5% to $23.8 billion cumulatively in the first 10 months of FY24 compared to the same period last year.

Remittance inflows during April 2024 were primarily sourced from Saudi Arabia ($712 million), the United Arab Emirates ($542.3 million), the United Kingdom ($403.2 million) and the United States of America ($329.2 million), according to the bank.

The remittances earlier had peaked near $3 billion in the prior month of March 2024, marking a 23-month high.

Separately, the Dawn newspaper reported that Pakistan is engaging with the Chinese leadership for the revival of more than 1800-megawatt of hydropower projects (HPPs) and investment from fresh Chinese companies in the country’s transmission and distribution network as part of the second phase of the China-Pakistan Economic Corridor (CPEC).

The authorities are trying to convene a meeting of the Joint Cooperation Committee (JCC) of the Cabinet on May 22-23 so that Prime Minister Shehbaz Sharif’s upcoming visit to Beijing early next month will be a success.

A high-level delegation led by Planning Minister Ahsan Iqbal is currently in China to pursue existing investors and financial institutions and tap into more firms in the transmission and distribution network as part of CPEC’s second phase.

In his meeting, Mr. Iqbal sought China’s continued cooperation in the early implementation of the Azad Pattan and Kohala hydropower projects. The two sides agreed to hold the next round of the Joint Working Group meeting on Energy (JEWG) soon.

Islamabad:

Pakistan’s leading right-wing Islamic leader Maulana Fazlur Rehman on Monday came out in support of his erstwhile rival Pakistan Tehreek-e-Insaf, saying the opposition party has the right to hold rallies and even form a government.

Rehman, the chief of his faction of the Jamiat Ulema-e-Islam Fazl (JUI-F), made a blistering speech in the National Assembly, slamming the powerful establishment for allegedly rigging the political system.

“It is the right of the PTI to hold a rally,” he said. “We also objected to the 2018 election and we object to this (February 8 polls) one too. If the 2018 poll was rigged, why is the current one not rigged?” he asked.

PTI leader Asad Qaiser had demanded the party’s right to organise a rally. “The demand of Asad Qaiser is correct and it is the right of PTI to hold a rally,” Rehman said in his speech.

Rehman urged the ruling coalition of the Pakistan Muslim League (Nawaz) and the Pakistan Peoples Party to allow the PTI to form the government if it enjoyed a majority in the parliament.  

“Leave this power. Come and sit here [on the opposition benches], and if the PTI is indeed the larger group, then give them the government,” he said.

The cleric then expressed his dismay over the role of the establishment and bureaucracy in election and running the country.

“The establishment and bureaucracy had no role in achieving this country,” he said.

He alleged that the elections held on Feb 8 were not fair but flawed.

“What kind of election is this where the losers are not satisfied and the winners are upset?” he said.

He drew parallels with neighbouring India. “Just compare India and ourselves… both countries got independence on the same day. But today they (India) are dreaming of becoming a superpower and we are begging to avoid bankruptcy,” he said.

While India is inching closer to become a Global Superpower, Pakistan is begging before the world to save it from devastation.

[Pakistan’s Parliament] pic.twitter.com/i3ZNA3kQaN

— kanishka Dadhich (@KanishkaDadhich) April 29, 2024

He said that decisions are made by somebody else but politicians are blamed for the problems.

Rehman also lamented the failure to implement recommendations from the Council of Islamic Ideology (CII), emphasising the importance of upholding Islamic principles.

“We got the country in the name of Islam, but today we have become a secular state. Since 1973, not a single recommendation of the CII has been implemented. How can we be an Islamic country?” he said.

The CCI is a constitutional body set up to help Islamize the laws.

He also said that Pakistan was begging the International Monetary Fund to avoid bankruptcy.

pic.twitter.com/KGHZhhVB18

— Maulana Fazl-ur-Rehman (@MoulanaOfficial) April 29, 2024

The JUI-F was the arch-rival of PTI and had spearheaded the move for the ouster of Imran Khan. After his downfall, JUI-F became part of the coalition government. However, he parted ways with the PML-N and PPP after the elections as he alleged that the polls were rigged to keep his party out of power.

It is believed by many that by supporting the PTI, the cleric is putting pressure on the establishment and the government to cut a deal to get a bigger share in the spoils of politics than his potential.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

The IMF has approved an immediate disbursal of USD 1.1 billion to Pakistan as part of a bailout package.
| Photo Credit: REUTERS

The International Monetary Fund has approved an immediate disbursal of USD 1.1 billion to Pakistan as part of a bailout package and said the country needs to take tough measures to bring its economy back on track.

A decision in this regard was taken by the International Monetary Fund (IMF) Executive Board as it completed the second and final review of Pakistan’s economic reform programme supported by the IMF’s Stand-By Arrangement (SBA).

With this development, the disbursements under the SBA reached around USD 3 billion.

IMF’s Deputy Managing Director Antoinette Sayeh said, “Given the significant challenges ahead, Pakistan should capitalize on this hard-won stability, persevering — beyond the current arrangement — with sound macroeconomic policies and structural reforms to create stronger, inclusive, and sustainable growth.” Continued external support will also be critical, she said.

Achieving strong, long-term inclusive growth and creating jobs require accelerating structural reforms and continued protection of the most vulnerable through an adequately-financed Benazir Income Support Program, the IMF official said.

Priorities include advancing the reform of state-owned enterprises (SOEs) and ensuring that all SOEs fall under the new policy framework, strengthening governance and anti-corruption institutions, and continuing to build climate resilience, she added.

The story so far: The International Monetary Fund (IMF) released the latest global financial stability report on Tuesday warning about the risks to the global financial system from persistent high inflation, rising lending in the unregulated credit market, and increasing cyber-attacks on financial institutions.

What is the IMF’s worry about inflation?

The IMF has flagged rising enthusiasm among investors that the fight against high inflation over the last few years has almost come to an end. Investors have been pushing up the prices of financial assets such as stocks in recent months in the hope that central banks will soon begin lowering interest rates as inflation comes under control. It should be noted that central banks generally try to lower interest rates by injecting more into the economy when inflation falls in an attempt to boost economic growth. Although central banks are yet to lower interest rates, investors may take falling inflation as a cue that central banks will soon flush the markets with more money to lower interest rates. So they go ahead and purchase financial assets in anticipation of greater demand for these assets when banks actually lower interest rates, thus pushing up the prices of these assets right now.

The IMF, however, believes that investor enthusiasm about slowing inflation and a possible cut in interest rates by central banks may be quite premature. It has noted that the fall in inflation has probably stalled in some major advanced and emerging economies where core inflation in the most recent three months has been higher than in the previous three months. The IMF has also warned that geopolitical risks such as the ongoing war in West Asia and Ukraine could affect aggregate supply and lead to higher prices. This, it believes, might stop central banks from lowering rates anytime soon.

If these risks persist, the IMF believes, investors who have been bidding up asset prices expecting fresh money from central banks to push up asset prices in the near future may change their mind. This could cause a sharp correction in the prices of various assets and leave many investors with significant losses.

What does it mean for India?

The IMF notes that fund flows into emerging markets have been strong till now due to optimism over central banks easing interest rates. In fact, in calendar year 2023, India was the second-largest recipient of foreign capital after the U.S., according to Elara Capital. But things could change quickly if western central banks signal that they could keep interest rates high for a long time. This could cause investors to pull money out of emerging markets like India and increase pressure on their currencies. The Indian rupee has already been depreciating and traded at a new low of 83.57 against the U.S. dollar last week despite likely intervention by the Reserve Bank of India (RBI). A severe outflow of capital if western central banks fail to lower interest rates could cause further depreciation of the rupee and have effects on the country’s financial system. In such a scenario, the RBI is likely to defend the rupee by curbing liquidity to raise interest rates, which could cause the economy to slow down.

What about the private credit market?

The IMF in its report also noted that the growing unregulated private credit market, in which non-bank financial institutions lend to corporate borrowers, is a growing concern as troubles in the market might affect the broader financial system in the future. It estimates that the private credit market globally grew to $2.1 trillion last year. The non-bank financial institutions lending to corporate borrowers include institutional investors such as pension funds and insurance companies. Institutional investors are investing in the private credit market because they offer higher returns than normal investments. Meanwhile, the borrowers benefit as they cannot get convenient long-term funds through other venues.

The IMF, however, is worried that the borrowers in the private credit market may not be financially sound and noted that many of them do not have current earnings that exceed even their interest costs. It also argues that since these loans rarely trade in an open, liquid market like many other securities do, it might be hard for investors to really gauge the risk involved in these loans. Thus private credit assets have significantly smaller markdowns in their mark-to-market value during times of stress, the IMF notes. In a highly liquid market where securities are traded frequently, the real risk behind a loan is priced in more immediately and also more accurately by investors. Nevertheless, it may be the case that institutional investors are fully willing to bear the risk in return for higher returns.

India has also seen the growth of a small private credit market with the rise of Alternative Investment Funds (AIFs). These funds lend money to high-risk borrowers who are not catered to by the traditional banking system and non-bank financial companies. They have also invested in distressed assets that have come up for sale under the Insolvency and Bankruptcy Code regime. The Securities and Exchange Board of India (SEBI) notes that investments made through these funds, although still small, have more than tripled from ₹1.1 lakh crore in 2018-19 to ₹3.4 lakh crore in 2022-23. As financial regulators, both the RBI and SEBI have been noticing this trend and tried to increase scrutiny over these funds.

The International Monetary Fund (IMF) logo. File.
| Photo Credit: Reuters

The International Monetary Fund (IMF) stands ready to support Sri Lanka’s discussions with international bondholders and will provide a formal assessment after the parties reach a tentative agreement-in-principle, an IMF spokesperson said on April 18.

“We hope an agreement consistent with the parameters of the IMF-supported program and official creditors’ Comparability of Treatment requirements can be reached soon, ahead of completing the second review under the program,” the spokesperson said.

Sri Lanka said it failed to reach an agreement with bondholders to restructure about $12 billion debt earlier this week, raising concerns there could be a delay in the island nation receiving a third tranche of its $2.9 billion IMF program in June.

The government said one of the main stumbling blocks had been that the “baseline parameters” of the bondholders’ plan had not matched those embedded in its IMF program.

“We encourage both parties to continue their discussions swiftly,” the IMF statement added.

Sri Lanka will consult with the IMF to assess if the latest proposals discussed with bondholders were within the parameters of its bailout program.

The island nation defaulted on its foreign debt in May 2022 and kicked off negotiations with bilateral creditors several months later, eventually securing an agreement in principle with China, India and the Paris Club last November.

Sri Lanka plunged into its worst financial crisis since independence from the British in 1948 after its foreign exchange reserves fell to record lows in early 2022, leaving it unable to pay for essentials including fuel, cooking gas, and medicine.

This handout photo released by Sri Lankan Prime Minister’s Office on March 27, 2024 shows Sri Lanka’s PM Dinesh Gunawardena (left) with Chinese President Xi Jinping, before a meeting in Beijing.
| Photo Credit: AFP

China has said it would continue to support Sri Lanka, as the crisis-hit island nation’s Prime Minister on March 30 wrapped up a visit to Beijing to try to finalise a debt restructuring deal.

Prime Minister Dinesh Gunawardena arrived in China on Monday for a visit that included meeting President Xi Jinping and an appearance at the Boao Forum, a high-profile international meeting.

Sri Lanka’s years-long economic crisis was high on the agenda during Mr. Gunawardena’s trip, with China accounting for around 10% of the South Asian country’s total foreign debt.

China is willing to “continue supporting its financial institutions to actively negotiate with Sri Lanka, maintain friendly communication with other creditors, play a positive role in the International Monetary Fund, assist Sri Lanka in financial relief,” Beijing’s Foreign Ministry said in the Chinese version of a joint bilateral statement released on March 29.

The two sides agreed to “make every effort to promote the Port City Colombo and Hambantota Development Project, turning them into flagship projects of the Sino-Sri Lankan joint construction of the ‘Belt and Road'”, the statement said, referring to Xi’s massive Belt and Road global infrastructure initiative.

The southern sea port of Hambantota was considered among the white-elephant projects launched by former president Mahinda Rajapaksa, who ruled the country for a decade until 2015.

Rajapaksa borrowed heavily from China for projects that many criticised as a debt trap that led to the worst economic crisis in Sri Lanka’s history. Unable to repay a huge loan taken from China in 2017 to build Hambantota port, Sri Lanka handed it over to the state-owned China Merchants Group for $1.12 billion on a 99-year lease.

Sri Lanka defaulted on its $46 billion external debt in April 2022 after it ran out of foreign exchange to finance even essential imports such as food, fuel and medicine. It secured a $2.9 billion International Monetary Fund (IMF) bailout last year, with the programme conditional on a debt deal that satisfies foreign creditors.

China had agreed “in principle” to restructure Sri Lanka’s debt in December, but neither Colombo nor Beijing had given details and the two are yet to finalise an agreement. Sri Lanka’s government said in January that a foreign debt restructure would be finalised by the beginning of April.