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India as last resort lender to permit Sri Lanka to repay debt over 12 years

By: Staff Writer

Colombo (LNW):India is likely to grant a 12 year moratorium to repay its debt to help ease the financial burden on the island nation, India’s Export Credit Guarantee Corporation (ECGC) Ltd’s chairman-cum-managing director M. Senthilnathan said, Indian news agencies reported.

This debt repayment concession offered by India to the island nations comes at a time, where President Ranil Wickremesinghe is visiting India for a day on July 21 to consolidate ties with New Delhi, which gave nearly US $ 3.5 billion in emergency aid to stabilize the island nation.

President Wickremesinghe will call on the entire Indian leadership from President Droupadi Murmu and Prime Minister Narendra Modi apart from holding delegation-level talks.

In 2022, as Sri Lanka’s economy entered into its biggest crisis since independence, the emergency financing extended or facilitated by India amounted to about $4 billion. Sri Lanka used about $3.3 billion during the course of the year, especially in the tumultuous first seven months. India became Sri Lanka’s lender of last resort even as the island entered sovereign default.

Sri Lanka, facing its worst economic and political crisis in over seven decades, owes $7.1 billion to bilateral creditors— $3 billion owed to China, $2.4 billion to the Paris Club and $1.6 billion to India.

“But the interest rate will come down. This is a situation induced by inflation and because of the fallout of (Ukraine) war. You accommodate them for the next 5-6 years and later the markets will open up,” Senthilnathan added.

Earlier this year, the International Monetary Fund (IMF) approved a $3 billion loan programme for Sri Lanka to help stabilize its economy and begin restructuring its debt.

The island nation received an immediate disbursement of about $333 million under the 48-month programme approved by the IMF.

Senthilnathan added that the National Export Insurance Account, managed by the ECGC, has received close to ₹4,500 crore worth of claims from exporters facing default in countries such as Sri Lanka, Zambia, Suriname and Ghana which faced extreme economic hardships after covid-19 and the Ukraine war.

Besides, its reserves have grown 26% to a 17-month high of $3.5 billion in May, helped by stronger remittances and tourism earnings.India had earlier extended a $1 billion credit line for Sri Lanka by a year.

The credit line, part of a $4 billion emergency assistance extended by India during the peak of Sri Lanka’s financial crisis early last year, was scheduled to end in March.

Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor disclosed.

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a yearend debt statement, issued by the Finance Ministry. Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

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