The negotiations were a step towards a comprehensive agreement between Sri Lanka and its creditors. A timeline was established for the restructuring process to be completed.

Sri Lanka is in a deep debt crisis, and early debt resolution is needed for Sri Lanka to emerge from its crisis, IMF Deputy Managing Director Kenji Okamura said.

“We hope all official bilateral creditors can participate and negotiations progress smoothly and swiftly, “Okamura said, Daily Mirror reported.

He believes that the most effective way to address the crisis is for all official creditors to come together and negotiate a resolution that works for both parties. This would allow Sri Lanka to pay off its debt and move forward with its economic development plans.

In addition, this would also benefit creditors, as it would provide them with regular payments and ensure their interests are protected. This could be a win-win situation for both parties and help Sri Lanka get back on its feet.

The launch of the talks came just a day after China agreed to soften some of its demands during a roundtable convened by the IMF and the World Bank. The roundtable was convened to devise broader guidelines for debt relief to low-income countries, Daily Mirror reported.

However, those discussions are poised to continue in the months ahead with significant issues unresolved. It is yet to be seen if China’s softened stance at the roundtable will secure a debt relief agreement. Nevertheless, the talks are a significant step forward in resolving the debt crisis.

Hanging over those wider talks are concerns about China’s role in negotiations involving countries like Sri Lanka and Zambia. These countries are facing increasing economic strains because of slow debt resolution. Sri Lanka and other creditors want China to participate. They were quite eager at that stage that China wouldn’t hold up negotiations any further.

Sri Lanka, in any case, was not willing to negotiate a separate debt deal with China, which would concern other creditors. This was because they were concerned that a separate deal would set a precedent. This would mean that other creditors could demand similar deals, disrupting the negotiations and delaying the debt issue resolution, Daily Mirror reported.

Japanese finance minister Shunichi Suzuki said China had been invited to the talks but had failed to participate.

The Chinese embassy in Washington was also reluctant to respond to a comment request. The Chinese government has yet to comment on the issue. Meanwhile, Japan has expressed disappointment at the Chinese government’s decision not to attend the talks. Japan has urged China to reconsider its decision and join the negotiations.

“We want China to participate in the talks very much,” Suzuki told reporters. “Talks should take place on an equal footing, with decisions made after negotiations using transparent debt data.”

Meanwhile, Sri Lanka’s president has called on China and its other creditors to quickly reach a compromise on its debt restructuring. This is the alternative to creating more economic peril, Daily Mirror reported.

Sri Lanka is already facing an economic crisis due to the COVID-19 pandemic and financial mismanagement, especially during Gotabaya Rajapaksa’s presidency. He granted an unprecedented tax benefit to big companies soon after the election. As a result, the government lost a lot of revenue due to government coffers.

Sri Lanka Central Bank Governor Nandalal Weerasinghe called for an early resolution of the restructuring talks. Without restructuring, the country would struggle to pay its debt obligations, and this could result in further economic hardship. This could also have a negative impact on the country’s credit rating and debt sustainability. Restructuring the debt would help the country manage its debt burden in a more manageable and sustainable way. It would also give it the opportunity to invest in economic recovery, Daily Mirror reported.

“It’s in the country’s interest for China and Sri Lanka both to complete this process soon, and we can get back to repaying our distressed obligation,” Weerasinghe said in an interview in March. “We have to do it as soon as possible.”

Paris Club members, including Japan, account for $4.8 billion, or more than 10 per cent of Sri Lanka’s external debt, according to IMF data. That is slightly higher than China, which stands at $4.5 billion, while India owes $1.8 billion.

“Given the relationship between Japan, India, the Paris Club, and China–and that none of them has as much skin in the game–the chances that China would join a group led by them were somewhere between slim and none,” said David Loevinger, a sovereign analyst at TCW Group and former U.S. Treasury Department senior coordinator for China affairs.

Sri Lanka is hoping to secure an agreement with China to restructure its debt, which could reduce the bailout burden. However, Sri Lanka has yet to finalise the agreement details. Until then, the country will remain dependent on an IMF bailout for its economic recovery, Daily Mirror reported.