India on Thursday extended a $1 billion credit facility to Sri Lanka to assist the island nation through its worst foreign exchange crisis and enable it to procure food, medicines and other essential items.
An agreement to this effect was signed between the State Bank of India and the Government of Sri Lanka on Thursday, during a visit of the country’s Finance Minister Basil Rajapaksa to New Delhi.
Mr. Rajapaksa, who met Prime Minister Narendra Modi on Wednesday morning to discuss Indian assistance amid Sri Lanka’s extraordinary economic crisis, also interacted with Finance Minister Nirmala Sitharaman and External Affairs Minister S Jaishankar on Thursday. An official statement from the Finance Ministry said issues of mutual interest and economic cooperation were discussed by the Ministers.
“Neighborhood first. India stands with Sri Lanka. US$ 1 billion credit line signed for supply of essential commodities. Key element of the package of support extended by India,” Mr. Jaishankar tweeted.
In 2022, so far India has extended $1.4 billion support to Sri Lanka, through a $400 million RBI currency swap, deferral of a $0.5 billion loan and another half a billion as a line of credit for the country to sustain its essential fuel imports.
Sri Lanka is facing its worst financial crisis, and had declared an emergency in August last in the face of a crippling foreign exchange crunch. The nation is still facing significant fuel and gas shortages, and high inflation in essential goods as well as food items. The situation has triggered a series of protests by the political Opposition and citizens’ groups, who blame the Rajapaksa government for the crisis.
Foreign exchange shortage
In a televised address to the nation on Wednesday, President Gotabaya Rajapaksa vowed to work with the International Monetary Fund to resolve the fiscal imbroglio. He said its root cause was the foreign exchange shortage due to a large $10 billion trade deficit.
Sri Lanka is due to repay foreign debt totalling nearly $ 7 billion this year, amid a persisting shortage of dollars to import food, medicines and other essentials. It has already sought China’s help to restructure its loans that amount to 10 % of its total foreign debt. Much of Sri Lanka’s external borrowings are though sovereign bonds in the international money market.
During Mr. Basil Rajapaksa’s talks with the Indian side, New Delhi and Colombo agreed to set up a “framework for short, medium and long-term economic cooperation” between the two countries aimed at addressing Sri Lanka’s present economic challenges, according to a media release issued by the Sri Lankan High Commission in New Delhi.
With this objective, Mr. Basil Rajapaksa, Mr. Jaishankar and Ms. Sitharaman agreed to stay “in regular contact”, while a coordinating mechanism comprising senior officials from both sides was set up to maintain regular dialogue, the Sri Lankan mission said.