In the guise of protecting Sri Lanka’s crashing economy,an attempt is being made to introduce a common currency between India and Sri Lanka through currency meger at a time the island nation is facing an unprecedented socio-economic crisis, informed sources revealed.
Ajay Sahai, director general and chief executive officer, Federation of Indian Export Organisations (FIEO), said a proposal for local currency trading was deliberated by the government.
In exactly a year since April 2021, the Sri Lanka government’s decision to peg its currency to the US dollar has come back to haunt the island nation.
International Monetary Fund (IMF) data shows the economy’s net international reserves have been negative since December last year, and in this fiery April, Sri Lanka has less than a month’s reserve of forex to service a debt of US $7 billion.
India stepped in to assist Sri Lanka at this critical and crisis- surrounded juncture by extending US$ 3 billion as its economic assistance so far this year thereby being instrumental in addressing diverse needs of the Government and the people who have now fallen from the frying pan into the fire.
Sri Lanka is going through its worst financial crisis since its independence in 1948. Tourism is the third largest source of foreign exchange for Sri Lanka, behind remittances and apparel exports.
While Covid badly hit tourist inflows, the government’s decision last year to switch to organic farming by stopping usage of chemical fertilisers disrupted traditional farming. This led to sky-rocketing inflation.
Sri Lanka’s usable foreign exchange reserves have slipped to US $ 50 at present which is barely sufficient for one month of imports from $ 103 at the beginning of April this year finance ministry data highlighted.
In this critical juncture some economic advisers in the government are advocating the currency merger as a solution to overcome the current financial debacle.
However India does not find local currency trading feasible with Sri Lanka under the current circumstances. This is because there’s no demand for Indian goods at present, except for essential items that India is supplying under humanitarian grounds.
Ajay Sahai, director general and chief executive officer, Federation of Indian Export Organisations (FIEO), said a proposal for local currency trading was deliberated by the government.
“In fact, we proposed trading in local currency. We said that since the balance of trade is in India’s favour, we will have a situation where money is lying in our account. Since a lot of companies are looking at investment opportunities in Sri Lanka also, that money can be used by them for investment there
However, we understand that this is a crisis we are dealing with and our focus should be on humanitarian issues. Business can take place later,” he added.
India is currently contemplating local currency trading with Russia as Western nations imposed economic sanctions after Russia invaded Ukraine. Most of Russia’s banks have been cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.
However, unlike with Russia, India had a trade surplus of about $3.8 billion with Sri Lanka in 2021. India’s exports were $4.8 billion and imports stood at $979 million.
India has responded to urgent requests from Sri Lanka with assistance worth $ 3 billion since January. A line of credit of $500 million has been provided by Exim Bank for petroleum products. Another $1 billion for food, medicine and essential items has also been signed.
The Reserve Bank of India (RBI) has also extended a currency swap of $400 million and deferred $500 million due for settlement through the Asian Clearance Union.
