India grants credit line worth billions to Sri Lanka

NEW DELHI/COLOMBO

India on Thursday extended a $1 billion loan facility to Sri Lanka.

An agreement to this effect was signed between the State Bank of India and the government of Sri Lanka on Thursday during a visit by the country’s finance minister, Basil Rajapaksa, to New Delhi.

Mr Rajapaksa, who met Prime Minister Narendra Modi on Wednesday morning to discuss Indian aid amid Sri Lanka’s extraordinary economic crisis, also met Finance Minister Nirmala Sitharaman and Foreign Minister S Jaishankar on Thursday. An official statement from the Ministry of Finance said that issues of mutual interest and economic cooperation would be discussed by ministers.

“Neighborhood first. India stands with Sri Lanka. Signed $1 billion credit line for essential supplies. Key element of India’s expanded support package,” Mr Jaishankar tweeted.

In 2022, India has so far provided $1.4 billion in support to Sri Lanka through a $400 million RBI currency swap, a $0.5 billion loan forbearance and another half billion as a credit line for the country to keep up its essential fuel imports.

Sri Lanka is facing its worst financial crisis and last August declared a state of emergency amid a crippling foreign exchange crisis. The nation still faces severe fuel and gas shortages and high inflation for essentials and food. The situation has sparked a series of protests by political opposition and community groups who blame the Rajapaksa government for the crisis.

lack of foreign exchange

In a televised address to the nation on Wednesday, President Gotabaya Rajapaksa pledged to work with the International Monetary Fund to resolve the fiscal mess. He said the main cause was FX shortages due to a large trade deficit of $10 billion.

Sri Lanka will have to repay foreign debts totaling nearly $7 billion this year as it continues to lack dollars to import food, medicines and other essential necessities. It has already asked for help from China to restructure its loans, which account for 10% of its total external debt. Much of Sri Lanka’s foreign debt is government debt on the international money market.

During Mr. Basil Rajapaksa’s talks with the Indian side, New Delhi and Colombo agreed to establish a “Framework for Short-, Medium- and Long-Term Economic Cooperation” between the two countries, aiming to solve the current economic challenges Sri Lankas, according to a media report release issued by the Sri Lanka High Commission in New Delhi.

With that aim, Mr. Basil Rajapaksa, Mr. Jaishankar and Ms. Sitharaman agreed to stay in “regular contact” while a coordination mechanism made up of senior officials from both sides was set up to maintain regular dialogue, the Sri Lankan mission said.

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