India Extends A $1 Bn Credit Fecility To Sri Lanka
India extended a $1 billion credit fecility to Sri Lanka to assist the island nation through its worst foreign exchange crisis triggered by a shortage of foreign exchange and enable it to procure food, medicines and other essential items. The agreement was signed between the State Bank of India (SBI) & Government of Sri Lanka, during Sri Lankan Finance Minister Basil Rajpaksha’s two- day visit to India. 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. With this objective, the three Ministers agreed to stay in regular contact and a coordinating mechanism consisting of senior officials from the two countries was set up to maintain a regular dialogue.
Sri Lanka is currently facing its worst economic crisis since the country gained independence in 1948. In spite of constant assurances by the governor of the Central Bank of Sri Lanka (CBSL), international rating agencies as well as economists have sounded the alarm about Sri Lanka’s ability to make its foreign debt repayments in 2022. A number of analyses indicate that Sri Lanka is on the verge of a sovereign debt default as the country’s usable foreign currency reserves plunged below $1 billion.
While Sri Lanka also signed numerous similar agreements with China, it was quick to understand after the Hambantota debacle that these wide cast loans at negligible interests were a trap. At this critical juncture, Sri Lanka sought Indian support. As has been the case at different times, India intervened to help Sri Lanka tide over the immediate difficulties with a series of economic package announcements like a USD 1 billion line of credit, a currency swap arrangement of USD 400 million and a debt deferral of USD 515 million for two months.
These announcements were necessary for Colombo to escape from the debt trap of loans that China had cast through numerous contractual agreements. Additionally, these would help in the purchase of essential food items, pharmaceutical products and oil for the beleaguered Sri Lankan nationals, who are facing severe economic hardships. Indian private sector has also evinced interest in cooperating /capacity building in sectors like hospitality, food processing, cement as well as pharmaceutical production. It must also be noted that Sri Lanka took the opportunity to invite the Indian Prime Minister to the BIMSTEC summit in Columbo at the end of this month to engage in substantive bilateral talks.
In this unprecedented economic crisis, China was not the only ally Sri Lanka sought support from. Over the last two years, Sri Lanka further strengthened economic relations with India and sought support numerous times. India too has leveraged this opportunity to expand its economic presence in Sri Lanka in light of an increasing Chinese economic presence in India’s close neighbour.
Along with India’s emergency financial assistance, Delhi has also conveyed to Colombo that Indian investments in renewable energy, ports, logistics, infrastructure and connectivity will help Sri Lanka build capacity “holistically”, repairing its economy. Sri Lanka should be cautious about protecting its national interest when entering economic deals. The country needs to facilitate investment and trade to fix unaddressed economic issues instead of attempting to benefit from geopolitical rivalries.
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