A subset of Sri Lanka's official creditors is reportedly pushing for a debt restructuring deal without China's involvement, according to anonymous sources cited by Bloomberg News. The proposal suggests that major creditors, including the US, Japan, and India, sign a memorandum of understanding with Sri Lanka around the time of the upcoming IMF and World Bank meetings in Morocco next month. China, which holds approximately 10% of Sri Lanka's external debt, is pursuing separate bilateral discussions.

Key debt holders, excluding China, aim to draft an outline and secure Sri Lanka's consent before the Marrakesh meetings, but some disagreements persist within the group. While the Paris Club, one of the largest debt holders, hasn't confirmed a timeline for the agreement, the IMF's Colombo office has yet to respond.

Sri Lanka's junior finance minister, Shehan Semasinghe, stated that all creditors are engaging positively. The motivation behind excluding China from the deal remains uncertain, whether due to impatience or as a negotiating tactic. Sri Lanka's debt restructuring serves as a test case for Chinese participation in sovereign debt restructurings.

Proceeding without China, the world's largest sovereign creditor, could represent a setback for global efforts to encourage China to join an international system for debt relief, a process that has been ongoing for nearly two years. Many countries face challenges servicing their debts due to the pandemic's economic impact, a strengthening US dollar, and rising US interest rates.

China's response remains uncertain. In the past, China has quietly negotiated its own debt restructurings with debtor nations, often without offering significant long-term relief. A Chinese Ministry of Foreign Affairs spokesperson expressed support for domestic financial institutions to negotiate settlement agreements with Sri Lanka.

If a debt restructuring agreement is reached, Sri Lanka could benefit even without China's involvement. The IMF's review of Sri Lanka's $3 billion bailout program concludes soon, and an agreement on debt restructuring could boost the nation's recovery from an economic crisis before the IMF's final assessment later this year.

Among creditors, Paris Club members accounted for over 10% of Sri Lanka's external debt, slightly exceeding China's share, according to IMF data as of year-end.