India stands by neighbor once again

The Indian Government has once again come to the aid of one its closest and oldest neighbors by extending a much needed line of credit worth USD 1 billion to Sri Lanka.

The Sri Lankan economy has been struggling in the past two years with its economic woes worsening this year and continues to worsen as days past.

One of the main issues faced by the Sri Lankan government is its dwindling foreign reserves which stand at roughly USD 2.2 billion according to the most recent report released by the International Monetary Fund on 19 March 2022.

The Easter Sunday attacks in 2019 along with the Covid 19 pandemic has crippled Sri Lanka?s tourism industry which the country heavily relied on to bring in much needed foreign exchange earnings.

To make matters worse Sri Lanka has massive debt obligations with debt maturing coming in this year.

One country Sri Lanka has a large amount of loan to repay to is the People?s Republic of China.

Since 2007, the Sri Lankan Government has been heavily borrowing and most of these borrowings have come from China with many experts and economists charging that it had fallen into one China?s infamous ?debt traps?.

In fact, due to mounting debt to the Chinese, particularly for the Hambantota Port project, the Sri Lankan Government in 2017 changed the terms of the agreement saying it would be difficult to pay the loans taken to build the project.

Prime Minister at the time, Ranil Wickremesinghe, agreed to lease the port for 99 years to China through a venture led by China Merchants Port Holdings Co. in return for $1.1 billion.

This desperate move helped to ease the Chinese part of the debt burden raised to build the port.

However, even to this day, a majority of foreign loans the Sri Lankan Government owes is to China.

With just $2.2 billion of foreign reserves the Sri Lankan government is struggling to pay for critical imports including fuel, food, medicines and LP Gas- the latter of which a great many Sri Lankan?s, especially in the urban areas, depend on to prepare and cook daily meals.

Due to the shortages, long queues have been common place at fuel stations and gas depots around the country.

The shortage issue had gotten so bad that three people have died just standing in queues to procure either fuel or gas.

As such the Sri Lankan Government is set to begin talks with the International Monetary fund next month.

Minister of Finance Basil Rajapaksa is set to travel to Washington in mid-April to present Sri Lanka?s proposal to the International Monetary Fund.

Up until March, the Central Bank of Sri Lanka had artificially pegged the Sri Lankan rupee to ensure it didn?t increase exponentially due to the lack of foreign reserves and rising inflation within the economy.

However, in March the Sri Lankan Central Bank took a policy decision to allow the Sri Lankan currency to ?float? in order to bring in much needed foreign exchange inflows from expatriate workers and exports- which had not been coming due to a growing black-market which had sold the dollar at market price which was much higher than the artificially pegged rupee.

This move by the Central Bank of Sri Lanka to float the rupee is in line with recommendations made by the International Monetary Fund.

It is at such a crucial time that Sri Lanka?s longtime friend and closest neighbor, India, has come to its aid with a much needed line of credit to purchase essential items.

As announced in January, the Government of India agreed to extend a USD 500 million line of credit to purchase fuel from India.

This Indian line of credit was utilized for the first time this week when the first shipment of fuel bought using USD 50 million out of the USD 500 million arrives at the Port of Colombo on Thursday (31).

Furthermore, on 18 March, during Finance Minister Basil Rajapaksa visit to New Delhi, an agreement was signed for India to extend a USD 1 billion line of credit so that Sri Lanka could purchase much needed essential items.

These items include rice, dhal, and pharmaceuticals.

The Credit Line would be extended through the State Bank of India.

Soon after the agreement was inked India Ministry of External Affairs Spokesperson Arindam Bagchi said India has always stood with the people of Sri Lanka and will continue to extend all possible support to the country.

?India has always stood with the people of Sri Lanka and we will continue to extend all possible support at this juncture. I think we are cognizant of the economic difficulties the country is facing,? Bagchi said addressing a weekly press conference adding that the credit line would be used to importing food, medicines and other essential items.

The signing Ceremony was held at the Indian Ministry of Finance and in the presence of Sri Lankan Minister of finance, Basil Rajapaksa, Indian Minister of External Affairs, S Jaishakar and Indian Minister of Finance Nirmala Sitharaman.

?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,??Indian Minister of External Affairs, S Jaishakar, tweeted just after the agreemend was signed showing the close connection between the two nations and india?s policy of standing by its neighbors at their time of need.

The Sri Lankan High Commission too issued a statement.

?The USD 1 billion loan facility, which formed the key component of the four-pillar economic cooperation arrangement agreed between India and Sri Lanka during Minister Rajapaksa?s visit to New Delhi in December last year, was extended to the government of Sri Lanka for procurement of food, medicines and other essential items,? the Sri Lankan high commission said in a statement.

The Sri Lankan High Commission further noted that the two governments had agreed on a framework for short, medium and long term economic cooperation.

?During the bilateral talks, the two sides 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,? the high commission said.

Earlier India assistance had also included included a Saarc currency swap of $400 million and deferral of an Asian Clearing Union settlement of $515.2 million by two months besides $500 million for procurement of fuel and the USD 1 billion line of credit for essential items.

– by Sandesh Pandya