Colombo needs more, India could increase aid by $2 billion

India and Sri Lanka are in talks to explore the possibility of improving the assistance provided by New Delhi in the form of credits for essential commodities and balance of payments support to the island nation in crisis.

India has so far committed $1.9 billion to Sri Lanka in the form of commodity and fuel credits, as well as loans and currency swaps. Union Finance Minister Nirmala Sitharaman met with Sri Lanka’s High Commissioner to India Milinda Moragoda on Wednesday to discuss the status of Indo-Lankan economic cooperation as Colombo begins talks with the IMF for a economic adjustment program.

Reuters reported on Wednesday that India “stands ready to commit up to an additional $2 billion in financial assistance to Sri Lanka…as New Delhi attempts to regain ground lost by China in recent years.”

The agency quoted a senior government source as saying that Sri Lanka’s warning on Tuesday about non-payment of debt was a concern but that “we can still give them up to $2 billion in swaps and support”.

Reuters quoted another source “familiar with Sri Lanka’s thinking” as saying it was seeking India’s help to defer some $2 billion in dues, such as those due to the Asia-focused Asian Clearing Union. South Asia. The source “said the response was positive from India, the agency reported.

The issue of New Delhi extending bridge financing required by Colombo until its economic adjustment program with the IMF is negotiated was also discussed, which could potentially make India the first country to back Sri Lanka. in this way, according to a statement from the Sri Lankan High Commission. said in India.

Explain

Payment default, policy vacuum

Lanka’s economic crisis is unfolding in a political vacuum. A new FM and a central bank governor are in place for talks with credit agencies, although a new cabinet is not in place.

On Tuesday, the Sri Lankan government said it was suspending repayment of its external debt, including bonds and government-to-government borrowing, pending the completion of a loan restructuring program with the IMF to in the face of the economic crisis unfolding in the island nation. .

India’s likely stepping up comes on the heels of China providing a $1.3 billion loan and $1.5 billion yuan-denominated swap to Colombo after the pandemic , with other credit lines from Beijing reportedly in the works.

Contacted on the matter by The Indian Express, Finance Ministry officials did not comment.
In January 2022, India had extended a $400 million currency swap to Sri Lanka under the SAARC and postponed a $515.2 million clearing Asian Union settlement until 6 May 2022.

A new line of credit of $500 million has been granted to Sri Lanka by the government for the importation of fuel from India. In addition, India has extended a $1 billion credit facility for the purchase of food, medicine and other essential items from India.
Sri Lanka is struggling with plummeting foreign exchange reserves and an estimated $25 billion in external debt to be repaid over the next five years.

“In this context, High Commissioner Moragoda and Minister Sitharaman discussed how India could assist Sri Lanka in securing international support for bridging funding… The High Commissioner briefed the Minister on the freezing of the debt announced by the Sri Lankan Government. He informed her that the Sri Lankan authorities were seeking a consensual agreement on debt restructuring,” the statement from the Lanka High Commission said.

The discussion also focused on how India could play a broader role in promoting accelerated growth and development in Sri Lanka in the medium term. Officials from the two countries are engaged in discussions to establish a cooperation framework and monitor the progress of economic cooperation, according to the statement.

The Presidential Advisory Group on Multilateral Engagement and Debt Sustainability, the Governor of the Central Bank and the Treasury Secretary participate in these discussions representing Sri Lanka, while India is represented by the Chief Economic Advisor of the government and the secretary for economic affairs.

Ministerial delegations from India and Sri Lanka are due to meet next week in Washington DC on the sidelines of IMF meetings.

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