Will New Delhi bring aid to ailing Sri Lanka?

(MENAFN- NewsIn.Asia) By PKBalachandran

Colombo, November 24 (SAM): Sri Lankan Minister of Finance Basil Rajapaksa plans to travel to New Delhi at the earliest to ask Prime Minister Narendra Modi for urgent help to overcome the island’s economic crises , in particular the part concerning the external debt repayment. According to sources, a request for a date with Modi has been made. If the appointment is given, the Lankan minister will travel for a day.

As Foreign Minister GLPeiris said, Basil Rajapaksa’s agenda is wide – to seek loans, investments and economic cooperation. The rescheduling of debt repayment could be an undeclared element, as Sri Lanka had previously requested it from India and China.

Subscribe to our Telegram channel for the latest updates from around the world

But experts wonder if a rushed day trip will help Sri Lanka, when the agenda is wide and lacks focus. There is a clear absence of detailed planning with the participation of both parties. Moreover, it is not even clear if the Sri Lankans worked out details to make the discussions useful.

At the virtual bilateral summit between Indian Prime Minister Modi and Sri Lankan Prime Minister Mahinda Rajapaksa in September 2020, the two leaders agreed to deepen cooperation in renewable energy with particular emphasis on solar projects in the part of India’s $ 100 million line of credit. Then, on June 16, 2021, the agreement in this regard between the Government of Sri Lanka and the Export-Import Bank of India, was exchanged by the High Commissioner of India to Sri Lanka, Gopal Baglay, and the Secretary of the Treasury, Mr. SR Attygalle, in the presence of Sri Lankan President Gotabaya Rajapaksa. But Colombo has yet to make plans to use India’s existing $ 100 million line of credit.

The other nagging question is whether, for the foreseeable future, Sri Lanka will be able to repay its loans even in the event of rescheduling.

READ: ISIS in Sri Lanka had planned attacks in all 9 provinces this year, investigation reveals – Prof Rohan Gunaratne

Talking State

Anyway, if an urgent meeting is sought with Modi, it is because of the precarious situation of the Lankan economy. According to the Central Bank of Sri Lanka, the total outstanding public debt is LKR 15 trillion and the debt-to-GDP ratio is 101%. 60% of the total debt is national and 40% is foreign.

In April 2021, the external debt stood at $ 35.1 billion. Of the US $ 35.1 billion, 47% (US $ 16,383.4 million) came from borrowings in international markets; 10% (US $ 3,388.2 million) belonged to China; 13% (4,415.7 million) to the Asian Development Bank; 9% (US% 3230.9 million) to the World Bank; 2% (US $ 859.3 million) to India, and the rest was owed to others.

Sri Lanka’s gross official foreign reserves fell to US $ 2,267 million in October 2021, down 73% in August 2019.

Meeting foreign currency debt service needs for 2022 will be the government’s immediate concern, said economic commentator Dinesh Weerakkody. He said two big payments are due in 2022: a US $ 500 million bond in January, followed by a US $ 1 billion debt maturing in July. It is estimated that a total of US $ 5 billion will be needed to service debt (principal plus interest) and other liabilities in 2022.

In 2020, imports were reduced by around US $ 3.9 billion (a 20% reduction from 2019), resulting in a US $ 2 billion decrease in the trade deficit. This gave the government temporary leeway to manage external debt repayments in 2020, said Umesh Moramudali, economist at the University of Colombo in his detailed article in The Diplomat.

Moramudali warns that with rising oil prices in the global market and an expected post-COVID economic recovery in Sri Lanka in 2022, fuel import bills will rise again, putting additional pressure on foreign exchange reserves . Referring to the government’s policy of banning imports to save foreign currency, Moramudali argues that the strategy of managing external debt by reducing imports is not a lasting solution for a country like Sri Lanka, in which more than half of imports are intermediate and capital goods.

READ: Pakistan allows India to send wheat to Afghanistan via its territory: Imran Khan

“The continued restriction on imports will hamper economic growth. which is not something Sri Lanka can afford at the moment, ”he said.

Sri Lanka has resorted to issuing international sovereign bonds (ISBs) and refinancing foreign loans. Successively swore by the ISBs. Indeed, unlike the IMF and concessional loans, BSIs have few or no conditions. But conditions are not favorable to poor countries with low foreign exchange reserves.

In a scathing commentary on the penchant for ISBs, Moramudali says: “ISBs are commercial loans, have a short repayment period, high interest rates and no grace period. BEIs have a payback period of 5 to 10 years with an annual interest rate above 6% payable semi-annually. On top of that, there are the principal payments – in other words, the total amount borrowed from an EIB is settled on the bond’s maturity date, all at once, rather than being spread over the years through annual repayments. Therefore, when an ISB matures, foreign debt repayment requirements skyrocket, resulting in a large outflow of foreign exchange. This leads to significant BOP vulnerabilities. Therefore, even though the ratio of external debt to GDP is lower than it was two decades ago, Sri Lanka’s vulnerabilities are much more severe and alarming, as the country’s debt dynamics have changed completely. paradigm.

READ: The President of India: Powers and responsibilities

IMF reckless rejection

Sri Lanka categorically opposes seeking IMF assistance because the IMF will impose conditions related to economic management that its populist governments have tended to mock. But what Colombo fails to realize is that Sri Lanka may not be able to maintain a sufficient level of foreign exchange reserves and meet its foreign debt repayment obligations in the absence of the aid. IMF, says Moramudali.

“With Sri Lanka’s low sovereign credit ratings and the ongoing pandemic, issuing ISBs doesn’t seem like an easy option for the Sri Lankan government (indeed, it seems almost impossible in the short term),” he observes.

Due to fear of COVID and lockdowns, there has been a large contraction in trade, low tax revenues and a lack of foreign direct investment (FDI) in Sri Lanka. Trade has contracted relative to GDP, from around 33% in 2000 to around 13% in 2019. Tourism has completely collapsed because, unlike the Maldives, Sri Lanka is too afraid to open its borders to foreigners. About 4 million out of a total of 21 million Sri Lankans depend directly or indirectly on tourism. These were running out of steam in 2021.

READ: State-of-the-art new Kelani bridge named ‘Golden Gate Kalyani’ at Peliyagoda to be declared open

Failure to provide comprehensive and coherent long-term solutions to address structural weaknesses in the Sri Lankan economy has resulted in a severe balance of payments (BOP) crisis in Sri Lanka every two years. Sri Lanka has been heavily dependent on foreign loans for development purposes over the past four decades and has now entered into trade with a number of countries.


Sri Lanka had asked for help from China and India to resolve the currency crisis. In March 2021, Sri Lanka secured a three-year US $ 1.5 billion swap facility from China. In August 2021, she secured a US $ 400 million swap with the Reserve Bank of India. Sri Lanka had signed the swap agreement available to SAARC countries in 2020 and repaid it in February 2021 after renewing it once. It also signed a SWAP deal for US $ 250 million with Bangladesh.

READ: Rawalpindi Chamber of Commerce and Industry signs MoUs with Lankan chambers

Silver lining

But there is a silver lining in this dark cloud. It is because Sri Lanka did not default on loan repayments even in 2020 when conditions were excruciatingly bad. He paid off the billion dollar bond before it matured. An additional US $ 400-500 million in other commitments has been honored. It has kept intact its reputation for honoring sovereign debts.


For similar articles, join our Telegram channel for the latest updates. – Click here

Debt moratorium Debt rescheduling Currency crisis Indian Prime Minister Modi Sri Lanka


Legal warning: MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility for the accuracy, content, images, videos, licenses, completeness, legality or reliability of the information contained in this article. If you have any complaints or copyright issues related to this item, please contact the supplier above.

About Vicki Davis

Check Also

The hidden cost of saving UK taxpayers billions of pounds

Placeholder while loading article actions With inflation soaring and UK official interest rates and government …