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India confirms financial assistance to Sri Lanka

India today confirmed financial assistance to the tune of USD 900 million to Sri Lanka.

The Indian High Commissioner to Sri Lanka Gopal Baglay met Central Bank Governor Ajith Nivard Cabraal.

The High Commissioner expressed India’s strong support to Sri Lanka in the wake of the Reserve Bank of India extending over USD 900 mn facilities to Sri Lanka over the last week.

“These include deferment of Asian Clearing Union settlement of over USD 500 mn and currency swap of USD 400 mn,” the Indian High Commission in Sri Lanka tweeted.

The High Commissioner noted that these steps are in line with India’s strong commitment to stand with Sri Lanka for economic recovery and growth.

Earlier, China had assured Sri Lanka continued economic assistance, hours after Central Bank Governor Ajith Nivard Cabraal said that Sri Lanka is negotiating another loan from China.

The Governor had also said that Sri Lanka is negotiating a USD 1 billion facility with India to import goods from India.

Cabraal said that this will also help Sri Lanka in its debt repayment and promote more trade with the respective countries.

In April 2021, foreign debt amounted to US$ 35.1 billion. Out of the US$ 35.1 billion, 47% (US$ 16383.4 million) was accounted for by international market borrowings; 10% (US$ 3388.2 million) was owned to China; 13% (4415.7 million) to the Asian Development Bank; 9% (US% 3230.9 million) to the World Bank; 2% (US$ 859.3 million) to India, and the rest was owed to others.

Sri Lanka’s gross official foreign exchange reserves fell to US$ 2,267 million in October 2021, down 73% August 2019.

Meeting foreign-currency debt-servicing needs for 2022 will be government’s immediate concern, economic commentator Dinesh Weerakkody says. 

According to him, two big payments are due in 2022 – a US$ 500 million bond in January, followed by US$ 1 billion of debt maturing in July. It is estimated that a total of US$ 5 billion will be required to service debt obligations (principal plus interest) and other commitments in 2022.

In 2020, imports were reduced by approximately US$ 3.9 billion (a 20% reduction in comparison to 2019) resulting in a US$ 2 billion drop in the trade deficit. 

This gave the government temporary breathing room to manage foreign debt repayments in 2020, points out, an economist.

He warns that with the increase in oil prices in the global market and an expected post-COVID economic revival in Sri Lanka in 2022, fuel import bills will rise again, putting further pressure on foreign reserves. 

Referring to the government’s policy of barring imports to save foreign exchange, he argues that the strategy of managing foreign debt through curtailing imports is not a sustainable solution for a country like Sri Lanka, in which more than half of imports are intermediary and capital goods.

The continuous restriction of imports will curtail economic growth. which is not something that Sri Lanka can afford right now,” he avers.

Sri Lanka has resorted to issuing International Sovereign Bonds (ISB) and roll over of foreign loans. Successives have been swearing by ISBs. 

This is because, unlike the IMF and concessionary loans, the ISBs carry few or no conditions. But the terms are not favorable for poor countries with low foreign exchange reserves.

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