The island nation needs $3 billion to $4 billion this year to pull itself out of economic trouble.
The scale of the crisis can be gauged by the fact that Colombo has halted foreign debt payments to ensure it has sufficient cash reserves for emergency supplies like fuel, food, gas, medicine and other essentials for its people.
Its economy has been in free fall since the start of the Covid pandemic, which brought a halt to tourism, a key source of foreign currency for the country.
Sri Lanka, which has been heavily dependent on external debt to keep its economy running smoothly, has been bailed out in the past by its competing neighbors – India and China.
In fact, over the years, he has cleverly pitted against each other to squeeze the maximum benefit from New Delhi and Beijing.
While Sri Lanka’s outstanding debt to China is around $3.5 billion, or 10.8% of the total, for India the figure is only around 2%.
The country’s increased reliance on Chinese loans has often been described as Sri Lanka falling into a debt trap. While China’s debt to Sri Lanka has steadily increased, aid from India has remained at a constant level.
Moreover, Chinese investment in Sri Lanka was largely driven by strategic interests, whether on infrastructure building or otherwise.
The data shows that market borrowing accounts for the majority of Sri Lanka’s external debt stock.
The Asian Development Bank’s (AfDB) share of Lanka’s outstanding debt is 13% and Japan’s 10%.
But China now seems reluctant to do more.
Beijing, which has often been accused by the United States of “debt diplomacy” to make developing countries dependent on its aid, is currently facing its own economic problems.
Lockdowns to contain China’s worst Covid outbreak since the start of 2020 have shuttered tech and financial hubs in Shanghai and Shenzhen.
India ready to help more
On the other hand, India, which has followed the “neighborhood first” policy to cement ties with its neighbors, is ready to go the extra mile to help Sri Lanka emerge from the current crisis.
India has so far committed $1.9 billion to the island nation in the form of loans, lines of credit and currency swaps.
New Delhi has expressed willingness to give another $2 billion in trade and support to Colombo, even as Beijing keeps Lanka guessing on loans and lines of credit.
India’s contributions so far
Over the past three months, India has extended around $2.5 billion in aid to Sri Lanka, including credit facilities for fuel and food.
Since mid-March, more than 270,000 metric tons of diesel and gasoline have been delivered to Sri Lanka.
In addition, about 40,000 tons of rice have been provided under the recently expanded $1 billion credit facility.
This additional billion dollars will help the country support a declining economy.
Ahead of the Sinhalese and Tamil New Year, India sent a shipment of 11,000 tonnes of rice to help people in Sri Lanka celebrate one of their biggest festivals.
In February, $500 billion was given to Sri Lanka by India in the form of a short-term loan to help it buy petroleum products through the Ministry of Energy and the Ceylon Petroleum Corporation in name of the government of Sri Lanka.
In November 2021, India had donated 100 tonnes of liquid nano-nitrogen fertilizers to Sri Lanka as its government halted the import of chemical fertilizers.
Separately, the Reserve Bank of India (RBI) extended a $400 million currency swap and deferred payments due from the Central Bank of Sri Lanka under the Asian Clearance Union for several hundred million dollars. .
On April 10, India sent vegetables and daily rations to Colombo to help the nation’s people who regularly struggle to secure essential items like food and medicine amid rising inflation rates. arrow.
He also sent ships with sugar, rice, and wheat—items of which he has a surplus.
Ministerial meeting on cards?
Sri Lanka’s new Finance Minister Ali Sabry is expected to meet an Indian ministerial delegation in Washington next week, on the sidelines of International Monetary Fund (IMF) meetings, to finalize a new round of aid from New Delhi, according to the ‘Economic Times. reported.
He further stated that Sri Lanka’s Presidential Advisory Group on Multilateral Engagement and Debt Sustainability, its Central Bank Governor and Treasury Secretary are engaged in discussions with India, which is represented by the chief economic adviser and the secretary for economic affairs.
According to some Sri Lankan officials quoted by ET, the two sides could establish a framework to monitor the progress of economic cooperation in the current context.
Lankans pin their hopes on IMF aid
Sri Lanka was downgraded deeper into junk by Fitch Ratings, which said on Wednesday that the country’s decision to suspend payments on its external debt had launched a process of sovereign default.
S&P said Sri Lanka’s next interest payments are due April 18 and failure to cover them will likely result in default, as will outright debt restructuring.
The desperate island nation is to formally enter loan negotiations with the International Monetary Fund.
Talks with the IMF are due to start in Washington on April 18 and Colombo expects emergency relief funds a week later, if all goes well.
“The nation plans to present a ‘decent case’ to the IMF to help preserve the economy,” Lanka Finance Minister Ali Sabry said in an interview with Bloomberg Television’s Yvonne Man and David Ingles.
“Our appeal to them is to release it as soon as possible,” Sabry said.
Sabry, along with new central bank governor Nandalal Weerasinghe, is a key member of the team handling the bailout talks with the IMF. The funds are crucial to the success of a debt restructuring process initiated by the island nation this week after suspending some ongoing loan and interest payments.
Sabry also sought to reassure investors of the country’s intention to repay the loans.
“What we have said very categorically, at all levels, is that we will honor our debt,” he said. “The commitment is there, the desire is there, but we don’t immediately have the funds to disburse.”
IMF involvement should make negotiations with bondholders easier, Citigroup Global Markets analysts Donato Guarino and Johanna Chua wrote in a note to clients. They see Sri Lanka asking investors to take a haircut of 50% on interest payments and 20% on principal, with an exit yield of 11%.
Sri Lanka is exploring bridge financing options and is confident it can get help from countries like China and India, Sabry said. This effort will be accompanied by tax reforms aimed at reducing spending and increasing revenues, he said.
Sri Lanka has witnessed massive street protests in recent days due to the economic crisis. Public anger led almost all ministers to leave the government. Calls for the resignation of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa are increasing.
The current crisis in Sri Lanka presents India with an opportunity to limit Chinese influence and involvement in the island nation.
(With agency contributions)