After the Russian-Ukrainian conflict, a worsening foreign exchange crisis in Sri Lanka has stoked new concerns for Indian exporters, who are in talks with the government to ensure their payments are not blocked.
It is important to note that almost all of the $1.5 billion lines of credit that India has extended to Sri Lanka since January to help it weather its worst financial crisis since 1948 has been used by the neighbor to pay for its imports, a senior government official told FE. . This means fresh supplies to the island nation carry heightened risks of default by Lankan importers.
India’s lines of credit included $1 billion for imports of food, medicine and essential items and another $500 million for petroleum products. In addition to this, India’s aid also included a $400 million RBI currency swap and a $500 million loan repayment deferral from Sri Lanka.
To overcome such a crisis, options suggested by Indian exporters include a temporary mechanism under which Lankan importers could be allowed to pay in their local currency. This can then be used by Indian importers to buy goods from the island nation, two trade sources said.
The other option for India is either to increase the current line of credit (in dollars) or to extend a new line of credit in rupees. However, both options involve tough choices for India. Sri Lanka is seeking another $1.5 billion line of credit from India, although India has yet to decide on the new request.
However, the problem with allowing Sri Lankan rupee payment is that India has had a decent trade surplus with the neighboring country in recent years, which only increased in FY22. India shipped goods worth $5.7 billion to Sri Lanka in the previous financial year, up 63% from the previous year. But New Delhi’s imports from Colombo may have only reached around $1 billion in FY22, resulting in a bilateral trade surplus of around $4.7 billion.
Likewise, the problem with the second option is that the government must make a decision on whether to extend more credit to a country that does not seem to be clearly in control of its finances anytime soon. Given that Sri Lanka’s sources of income are limited (the country relies heavily on tourism for its income), granting new lines of credit, in dollars or rupees, would be a difficult decision to make, said the one of the sources cited above. .
Of course, the Lankan importers have not yet missed payments, although in some cases payments are delayed. But large-scale defaults by Lankan importers cannot be ruled out if the forex crisis is not stemmed soon, Indian exporters fear.
According to Raja M Shanmugham, managing director of clothing company Warshaw International and chairman of the Tirupur Exporters Association, Sri Lankan importers have the option of paying in their national currency. They have no problem if they are allowed, under some mechanism, to pay in their own currency.
Sri Lanka’s economy – which relies heavily on tourism and exports of cash crops like tea – has been hit by the pandemic as travel restrictions have hit tourism. Its GDP contracted by a record 3.6% in 2020 and its foreign exchange reserves have collapsed by 70% over the past two years to around $2.31 billion in February, leading to a sharp depreciation. of its currency. Meanwhile, its debt has ballooned to $51 billion.
The island nation is watching one crisis after another as it must pay off around $4 billion in debt in 2022, including a $1 billion international sovereign bond that matures in July. Its new finance minister, Ali Sabry, resigned less than 24 hours after taking office and the Rajapaksa government has now lost its majority in parliament.
Colombo is heavily dependent on New Delhi for the supply of a wide range of goods. These include mineral fuels, pharmaceuticals, steel, textiles (mainly fabrics and yarns), food products and automobiles.