India steadfast in its support of Sri Lanka during crisis

By Shankari Desai

India continues help its close neighbor Sri Lanka which is facing the worst economic crisis in its history, by lending economic support and assistance.

Indian Minister of Finance Nirmala Sitharaman told The International Monetary Fund recently to help Sri Lanka by extending its rapid aid facility even though Sri Lanka is classified as middle income country because the pandemic had destroyed it’s the island’s tourism revenue.

Minister Sitharaman also asserted that China must be treated like any other creditor when talks begin to restructure Sri Lanka’s debt.
China is famously known for refusing any debt restructuring mechanisms.

“China must be treated just like any other creditor once talks begin to restructure Sri Lanka’s debt, India’s Finance Minister Nirmala Sitharaman said she told the International Monetary Fund and World Bank.

“All creditors must be treated equally and with transparency,” Sitharaman said in an interview in Washington Friday. “I’ve emphasized that point in general and in the context of Sri Lanka.”

China Ready to Offer Sri Lanka ‘Urgently Needed Help’ Sri Lanka was looking to borrow $1 billion from Beijing so that it can repay existing Chinese loans due in July, as well as a $1.5 billion credit line to purchase goods. The South Asian nation, which is running out of dollars to pay for imports, is also seeking aid from neighbor India, the World Bank and the IMF.
Sitharaman said she has also requested the IMF consider rapid aid for middle income-classified Sri Lanka — typically given only to low-income countries — as the pandemic has destroyed the island’s tourism revenue.

With foreign-exchange earnings plunging, Sri Lanka struggled to manage its external debt, which had grown in part due to loans from China to fund ambitious infrastructure projects. Sri Lanka had about $3.5 billion in debt from China by end-2020, excluding loans to state enterprises, according to central bank data,” a recent media report revealed.

Sri Lanka is facing its worst economic crisis in the nations post independence history with foreign reserves plummeting to a below USD 2 billion in the last month.

The reason behind the crisis financial mismanagement by the ruling Rajapaksa Government coupled with the Corona Virus Pandemic as well as the Easter Sunday attacks of 2019- the latter two which devasted tourism industry which the country relies on for the much needed foreign exchange inflows.

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.

Earlier this month Sri Lanka’s Central Bank announced that it would temporarily suspend debt repayment- which many have opined is a soft default on its loans.

This is the first time in Sri Lankan history that it has defaulted on it loans. Around 10% of the country’s loans are to China.
The negative aspect of the loans taken from china are that they are taken on commercial interest rates which means the islnd nations has to massive amounts in interest payments alone.

With less than USD 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.
It was reported on Sunday that in addition to the USD 1.9 billion assistance already extended, India would look to defer USD 1.5 billion in imports to help Sri Lanka in these trying times.

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 he USD 500 million arrives at the Port of Colombo on Thursday (31 March).

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.

It has also been reported that India is planning on deferring further debt repayments Sri Lanka owes to India as a means to help the island nation in this devastating economic crisis..