By Jorgelina do Rosario

LONDON (Reuters – Sri Lanka is facing a host of challenges, including political instability, social unrest, and a complicated web of creditors that could impede its efforts to quickly restructure $12 billion of overseas debt. Analysts warn the South Asian nation is on the verge of crashing down.

Complexity has added to South Asia’s most severe financial crisis since 1948, when it was triggered by loans from Japan, China, and India, as well as bonds that were held overseas and discussions on an International Monetary Fund rescue plan.

S&P Global (NYSE:) Ratings on Monday cut Sri Lanka’s foreign-currency debt rating to “selective default” after it missed interest payments.

Over the last week there was a lot of activity. The World Bank offered $600million to assist with imports. Meanwhile, the IMF recommended that governments raise interest rates, taxes, and allow for flexible exchange rates. Sri Lanka announced it had started debt-refinancing talks with China.

“The IMF has responded very positively and we feel they will attempt to expedite a program within the parameters,” Nalaka godahewa, cabinet spokesperson told Reuters. We are currently in talks with India, (World Bank), and (Asian Development Bank), for additional support. This means that Sri Lanka will be able to better manage the funds until they arrive.

The Finance Ministry did not respond to our request for comment.

After a significant 2019 tax cut by President Gotabaya Rajapaksa, the economy of this nation of 22million people collapsed. COVID-19 also hit lucrative tourism. Colombo’s foreign reserves have fallen 70% to $1.93 Billion in the last two years, making it difficult to purchase fuel, medicine, and food.

Tens of thousands protested against rising inflation and food shortages for many weeks.

Colombo believes it will be able to conclude IMF assistance talks within six months, but cannot predict how long it will take.

Guido Chamorro is emerging market portfolio manager for Pictet Asset Management. He said that six months was quite ambitious. The company holds Sri Lanka’s bonds. “Sri Lanka refused for years to join the IMF. This means that the Fund will demand reforms be done before they provide a package.

Investors may not be as patient.

Joe Delvaux is the portfolio manager for Amundi Asset Management. The company holds bonds from the country. “Waiting six month with the current status of affairs it not something feasible,” he said.

Before any debt negotiations with creditors overseas, the government must still choose financial and legal advisors.

Godahewa is the media minister of the country. He said that the government had received more than 50 replies to its request for legal and financial advisers. “We will move quickly.”

CHINA’S ROLE

Sri Lanka seeks $3 billion of bridge financing. India, in addition to its World Bank promise of $1.9 billion, has also committed $1.5 billion for credit.

Nathalie Marshik from Stifel, who heads emerging market sovereign research said that many of the recent government decisions “have added more pressure on the debt sustainability.”

Recent actions by policymakers have been limited to paving the way for India’s 17th IMF program. This programme saw the rupee devalued by around one third in March, and almost double the interest rate with an additional 700 basis points.

After posting a fiscal deficit exceeding 10% of its GDP in 2021, Sri Lanka’s ability to increase revenue is uncertain. This comes despite opposition to tax cuts being reversed after rising prices for fuel and cooking gases.

Pictet’s Chamorro stated that “measures would likely harm the pockets of most people.”

China is a powerful influence: China has made investments in projects such as highways and ports, airports, coal power plants, and port facilities.

Godahewa, the Cabinet spokesperson stated that China is “the only concern” of the government and said “We will use our good relations with China.”

According to the Institute of International Finance, Sri Lanka owes Beijing $6.5 billion for financing through development bank loans to a swap central bank.

Sergi Lanau (deputy chief economist of the IMF) stated that “the IMF requires assurances China, India, and Japan will provide some form of financing.”

Stifel’s Marshik stated that the recent discussions on Suriname’s debt are worth “close scrutiny”. This was due to a combination Paris Club support for IMF programmes and Chinese participation.

However, not all recent progress in debt negotiations where China is a major creditor has been rapid. Two years ago, the default of South Africa’s southern African nation saw Beijing agree to join Zambia’s creditor panel. This was only two weeks after Beijing had agreed.

And this was despite the fact that Zambia, unlike Sri Lanka qualified for an overhaul in accordance with the Common Framework — a G20 initiative to simplify restructurings for countries less fortunate.

Until there’s more information on the IMF program, investors in Sri Lanka are waiting and watching. But time is running out.

Lanau of the IIF stated that Sri Lanka faces a gap in the amount of $2.5 billion for 2022-2023. Sri Lanka also needs $1 billion to cover this gap. The country requires fresh funds to invest. Without it, the country will soon collapse.”