(Reuters): Sri Lanka has sought an additional credit line of $1 billion from India to import essentials amid its worst economic crisis in decades, two sources said on Monday, as the Indian foreign minister held talks with the neighbouring island’s government.
The country of 22 million people is struggling to pay for essential imports after a 70% drop in foreign exchange reserves in two years led to a currency devaluation and efforts to seek help from global lenders.
Fuel is in short supply, food prices are rocketing and protests have broken out as Sri Lanka’s government prepares for talks with the International Monetary Fund (IMF) amid concerns over the country’s ability to pay back foreign debt.
New Delhi has indicated it would meet the request for the new line, to be used for importing essential items such as rice, wheat flour, pulses, sugar and medicines, said one of the sources briefed on the matter.
“Sri Lanka has requested an additional $1 billion credit line from India for imports of essentials,” the second source said. “This will be on top of the $1-billion credit line already pledged by India.”
Both sources declined to be identified as the discussions were confidential.
The finance and foreign ministries of Sri Lanka, as well as India’s foreign ministry, did not immediately respond to requests seeking comment.
India’s support for the roiled Sri Lankan economy comes after previous administrations led by the powerful Rajapaksa family drew the island nation closer to China during the past decade, leading to unease in New Delhi.
Sri Lanka-India ties have improved in recent months, and Sri Lankan Finance Minister Basil Rajapaksa travelled to New Delhi in March to sign the earlier credit line of $1 billion to help pay for critical imports.
In Sri Lanka’s main city of Colombo for talks, Indian Foreign Minister Subrahmanyam Jaishankar met the finance minister and his brother, President Gotabaya Rajapaksa, on Monday.
“Reviewed various dimensions of our close neighbourly relationship,” Jaishankar said in a tweet after meeting the president. “Assured him of India’s continued cooperation and understanding.”
In addition to the credit lines, India extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka earlier this year.
Sri Lanka’s imports stalled, causing shortages of many essential items, after foreign currency reserves fell to $2.31 billion by February.
The nation just off India’s southern tip has to repay debt of about $4 billion in the rest of this year, including a $1-billion international sovereign bond that matures in July.
Faced with a swiftly deepening crisis, President Rajapaksa has also sought help from Beijing, including a request to restructure debt payments.
His government is negotiating $2.5 billion in credit support from China, with a decision expected in the next few weeks.
Finance Minister Rajapaksa is set to fly to Washington, D.C. next month to start talks with the IMF for a rescue plan and also seek support from the World Bank.
“India is also very supportive of Sri Lanka’s decision to seek an IMF programme and has given their fullest support,” one of the sources added.
Sri Lanka’s government bonds fell on Monday after the IMF warned the country needed a “comprehensive strategy” to make its debt sustainable.Writing by Devjyot Ghoshal Editing by Clarence Fernandez and Mark Potter