IMF Caught Off Guard as China Strikes Sri Lanka Debt Deal

China reached a tentative debt agreement with Sri Lanka, front-running separate talks the International Monetary Fund and other creditors are holding with the South Asian nation and catching them by surprise.

The deal between Export-Import Bank of China and Sri Lanka was reached late last month, China’s Foreign Ministry said Tuesday, without providing details of the pact.

The IMF, Paris Club members including Japan, and other lenders like India are expected to hold talks this week in Morocco on a debt restructuring plan. China, which isn’t part of that official group even though it’s one of Sri Lanka’s biggest creditors, has been pursuing bilateral negotiations with the South Asian nation instead.

Peter Breuer, senior mission chief for Sri Lanka at the IMF, said while it was aware discussions were taking place with creditors, “we have not yet been informed about any specific agreements.” The multilateral lender would need to “assess the entire package of agreements in its totality to assess consistency with IMF debt targets,” he said.

Officials from two creditor nations, who asked not to be identified, said they weren’t informed about the terms and details of the China deal.

The preliminary pact is not expected to change efforts by the official creditor committee to try to reach a debt deal in Marrakech, which would include safeguards to prevent favorable payment terms to China, one of the people said.

An Indian official involved in the debt discussions said New Delhi has been pushing for equal and fair treatment in the restructuring plan, and hopes that all creditors are transparent in their approach.

Sri Lanka owes about 40% of its bilateral debt to China and 16% to India, according to estimates from the IMF. Reaching a deal quickly with its creditors will allow Sri Lanka to keep tapping funds from its $3 billion bailout program with the multilateral lender.

Sri Lanka’s central bank Governor Nandalal Weerasinghe and Junior Finance Minister Shehan Semasinghe are in Marrakech this week at the IMF and World Bank annual meetings. Semasinghe met with Robert Kaproth, deputy assistant secretary for the US Treasury, he said in a post on social media platform X, with the two discussing the IMF program and the debt restructuring process.

The official creditors committee was aiming to sign a memorandum of understanding with Sri Lanka at the Marrakech meeting without the participation of China, Bloomberg News reported last month. While nothing has been finalized yet, an announcement on that deal during the meetings this week is looking increasingly unlikely, according to people familiar with the situation, who asked not to be identified..

The Exim Bank deal comes a week before China hosts its third Belt and Road Forum in Beijing, a flagship program by President Xi Jinping that has faced criticism for burdening developing nations like Sri Lanka with debt.