Exclusive-Paris Club to give Sri Lanka financing assurances amid IMF debt talks - sources

© Reuters. FILE PHOTO: A man walks past the International Monetary Fund (IMF) logo at its headquarters in Washington, U.S., May 10, 2018. REUTERS/Yuri Gripas/

By Jorgelina do Rosario

LONDON (Reuters) - The Paris Club of creditor nations is ready to provide financing assurances to Sri Lanka, a key step needed to unlock a $2.9 billion bailout by the International Monetary Fund (IMF), two sources with direct knowledge of the matter told Reuters.

The informal group of bilateral lenders is set to announce its support to the crisis-hit nation on a debt overhaul "soon", said one of the sources, who asked not to be named because the talks are private.

The Asian island nation, which is grappling with soaring inflation, a recession and currency depreciation, entered into a staff level agreement with the IMF last September. But it needs financing assurances from key bilateral lenders before the fund's executive board approves the programme.

Sri Lanka's public debt stood at 122% of GDP, of which 60% is denominated in foreign currency, according to data in a country presentation to investors in November.

China and India, both non-Paris Club members, are among the country's top bilateral lenders. "Paris Club assurance is not reliant on China," the source said.

Another source said the informal group is currently reaching out to other non-Paris Club members, besides China, on financing assurances, but did not provide any further details.

India previously committed to help ease the debt burden of neighbour Sri Lanka as part of the IMF programme, and China's EximBank offered a two-year moratorium in a letter sent in January.

The IMF's research director, Pierre-Olivier Gournichas, described the debt relief provided by India as a "good development" because it's "consistent with helping the country restore its debt sustainability".

The Fund has not yet provided any guidance on where it stands regarding China's assurances to Sri Lanka, though a U.S. official visiting Colombo said on Wednesday that Beijing has not done enough.

"What China has offered so far is not enough. We need to see credible and specific assurances that they will meet the IMF standard of debt relief," U.S. Under Secretary of State for Political Affairs Victoria Nuland told reporters. The U.S. is the largest IMF member.

After the IMF said Sri Lanka's debt level was unsustainable, the Fund requested an initial but firm commitment on debt relief from the country's key bilateral creditors in line with restoring debt sustainability.

Once those assurances are secured, the IMF's cash disbursements can begin. The lender's board approval also triggers additional financing from multilateral partners.

If China's financing assurances are not enough, the IMF could kick off the disbursements despite sovereign arrears to official bilateral creditors, though it is still not clear whether it will apply this policy to Sri Lanka.