By Uditha Jayasinghe and Andrea Shalal
COLOMBO/WASHINGTON (Reuters) - Sri Lanka looks set to get a sign-off on a long-awaited $2.9 billion four-year bailout from the International Monetary Fund (IMF) on March 20 after the crisis-hit country secured new financing support from China.
The IMF and the island nation confirmed on Tuesday that Sri Lanka had received assurances from all its major bilateral creditors, a key step to deploy financing and an important moment for the country engulfed in its worst economic crisis since independence from Britain in 1948.
Sri Lankan President Ranil Wickremesinghe told parliament there were signs the economy was improving, but there was still insufficient foreign currency for all imports, making the IMF deal crucial so other creditors could also start releasing funds.
"Sri Lanka has completed all prior actions that were required by the IMF," Wickremesinghe said, and that he and the central bank governor had sent a letter of intent to the IMF.
"I welcome the progress made by Sri Lankan authorities in taking decisive policy actions & obtaining financing assurances from all their major creditors, incl. China, India & the Paris Club," IMF chief Kristalina Georgieva said on Twitter, adding that she looked forward to presenting the IMF-supported program to the executive board on March 20.
Approval is expected since the board generally will not add items to its agenda unless its members are ready to act.
The country's international debt and currency soared higher on the news, with bonds adding around 3 cents in the dollar, while the Sri Lankan rupee jumped as much as 7.8% to a 10-month high. Stocks closed more than 2% higher.
A new letter by the Export-Import Bank of China (EXIM) sent on Monday to Sri Lanka resolved the stalemate. Sources close to the talks said EXIM provided "specific and credible" financing assurances for a debt restructuring, with a specific link to the IMF program and clear language on debt sustainability.
The first tranche of funding was expected to be released shortly after the board meeting, the sources added.
In a letter in January, EXIM had offered Sri Lanka a two-year debt moratorium, but sources said this was not enough to meet IMF conditions.
"This is a positive development: it might be the first time that China provides textbook financing assurances to the IMF outside of a Common Framework process," said Theo Maret, senior research analyst at Global Sovereign Advisory, in Paris.
By end-2020, Sri Lanka owed EXIM $2.83 billion, or 3.5% of its central government debt, according to IMF data. In total, Sri Lanka owed Chinese lenders $7.4 billion, or nearly a fifth of public external debt, by end-2022, calculations by the China Africa Research Initiative showed.
IMF financing provides an anchor for countries to unlock other funding sources. Sri Lanka was in negotiations with India, its second biggest creditor, to extend a $1 billon credit line due to expire by March 17, two sources said.
Sri Lanka needs to repay about $6 billion on average each year until 2029 and will have to keep engaging with the IMF, Wickremesinghe said.
Countries in debt distress such as Zambia and Sri Lanka have faced unprecedented delays in securing IMF bailouts as China and Western economies have clashed over how to provide debt relief.
Sri Lanka has been waiting for about 187 days to finalise a bailout after reaching a preliminary deal. This compares to a median of 55 days it took low- and middle-income countries over the past decade to go from preliminary deal to board sign-off, according to data compiled by Reuters.
"Debt restructurings both within and outside the Common Framework have been taking longer than usual due to issues with creditor coordination and foot-dragging by China," said Patrick Curran at Tellimer. "The restructurings in Sri Lanka and Zambia are likely to set important precedents for future restructurings."
Chinese Foreign Minister Qin Gang said on Tuesday that Beijing would continue to participate in the settlement of international debt problems in a constructive manner.
Responding to a question on the sidelines of an annual parliament meeting, Qin also said China should be the last to be accused of causing debt traps and called on other parties to share the burden.
(This story has been corrected to say central government debt instead of external debt in paragraph 12)