India extends $1 billion line of credit to Sri Lanka

India on Thursday extended a $1 billion credit facility to Sri Lanka to help the island nation weather its worst currency crisis and afford food, medicine and other essentials.

An agreement to this effect was signed Thursday between the State Bank of India and the government of Sri Lanka, during a visit by the country’s finance minister, Basil Rajapaksa, to New Delhi.

Mr Rajapaksa, who met Prime Minister Narendra Modi on Wednesday morning to discuss Indian aid amid Sri Lanka’s extraordinary economic crisis, also interacted with Finance Minister Nirmala Sitharaman and External Affairs Minister S Jaishankar. An official statement from the Ministry of Finance indicates that issues of mutual interest and economic cooperation were discussed by the ministers.

“The neighborhood first. India is alongside Sri Lanka. Signing of a $1 billion line of credit for the supply of essential products. Key part of India’s support package,” Mr Jaishankar tweeted.

In 2022, so far, India has provided $1.4 billion in support to Sri Lanka, through a $400 million RBI currency swap, deferred loan of 0 .5 billion dollars and an additional half a billion in the form of a line of credit for the country to maintain its imports of essential fuels.

Sri Lanka is facing its worst financial crisis and declared a state of emergency last August in the face of a crippling currency crisis. The nation still faces significant fuel and gas shortages, and high inflation of essential goods as well as food items. The situation has sparked a series of protests from political opposition and citizens’ groups, who blame the Rajapaksa government for the crisis.

Currency shortage

In a televised address to the nation on Wednesday, President Gotabaya Rajapaksa pledged to work with the International Monetary Fund to resolve the fiscal imbroglio. He said its root cause was the shortage of foreign currency due to a large trade deficit of $10 billion.

Sri Lanka must repay an external debt totaling nearly $7 billion this year, amid continued shortages of dollars to import food, medicine and other essentials. It has already requested help from China to restructure its loans, which represent 10% of its total external debt. Much of Sri Lanka’s external borrowing is through sovereign bonds in the international money market.

During Mr. Basil Rajapaksa’s talks with the Indian side, New Delhi and Colombo agreed to set up a “short, medium and long-term economic cooperation framework” between the two countries aimed at tackling Sri Lanka’s current economic challenges. Lanka, according to a media outlet. press release issued by the Sri Lankan High Commission in New Delhi.

To this end, Mr. Basil Rajapaksa, Mr. Jaishankar and Ms. Sitharaman have agreed to remain in “regular contact”, while a coordination mechanism comprising senior officials from both parties has been set up to maintain regular dialogue, said the Sri Lankan mission.

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