May 28, 2024

India, China, Bangladesh to help Sri Lanka steer economic crisis

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(Reuters): India, China, and Bangladesh have stepped in to help Sri Lanka weather a foreign exchange shortage that has forced it to devalue its currency amid soaring inflation and to seek International Monetary Fund (IMF) assistance.

Sri Lanka’s worst economic crisis in decades is a result of mismanaged government finances and ill-timed tax cuts, alongside the impact of the COVID-19 pandemic.

With only $2.31 billion left in reserves, Sri Lanka has to repay debt of about $4 billion over the rest of this year, including a $1 billion-international sovereign bond that matures in July.

Below is a look at external help Sri Lanka has received since last year:

Bangladesh

Last May, Bangladesh’s central bank agreed to a $200 million swap, the first swap arrangement between the two countries.

IMF

In August, Sri Lanka received its $787 million share of the global $650 billion Special Drawing Rights (SDR) allocation from the IMF. This was part of pandemic support extended by the lender and the funds were used to top up reserves.

Foreign Minister Basil Rajapaksa is set to hold talks with the IMF in April.

The island nation of 22 million people is struggling to pay for essential imports after a 70% drop in foreign exchange reserves over the past two years.

China

Last August, Sri Lanka received the last tranche of a $1.3 billion syndicated loan from the China Development Bank negotiated in 2020.

Sri Lanka’s central bank received a $1.5 billion swap denominated in yuan in December, which was again used to top up reserves.

Sri Lanka, which had drawn closer to China in recent years, ended 2021 with reserves of $3.1 billion.

China is considering offering a $1.5 billion credit facility to Sri Lanka, besides a separate loan of up to $1 billion which the government has requested.

China is Sri Lanka’s fourth-biggest lender, behind international financial markets, the Asian Development Bank (ADB) and Japan.

India

The Reserve Bank of India January announced a $400 million swap to help Sri Lanka shore up reserves, as part of an aid package the neighbors negotiated.

Sri Lanka signed an agreement for a $500 million credit line to purchase fuel from India in February.

The agreement proved critical as global oil prices soared after Russia invaded Ukraine and Sri Lanka’s fuel import costs jumped as much as 40% in a week.

Fuel shortages have led to long lines at petrol stations and rolling power cuts across much of the country. Shipments from the Indian Oil Corporation began arriving around mid-March.

In the same month, Sri Lanka and India signed a $1 billion credit line for importing essentials, including food and medicine.

Sri Lanka has sought an additional credit line of at least $1 billion from India to help bring in essentials as shortages persist and protests break out.

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