Will India’s line of credit suffice to revive Sri Lanka’s economy?
Posted on March 18th, 2022

By Lakshmi Subramanian  Courtesy The Week

There is palpable anger in island nation against govt

On Friday, a day after India extended one billion dollar line of credit to Sri Lanka, the official Twitter handle of Indian High Commission in Sri Lanka noted, A friend holds out a helping hand again!!!Energizing bilateral economic partnership, India offers a credit line of USD 500 million for purchase of petroleum products. Critical support follows a discussion between EAM Dr S Jaishankar and finance minister Basil Rajapaksa.”

Sri Lanka’s finance minister Basil Rajapaksa was on a three-day trip to New Delhi, seeking help to assist the falling foreign exchange reserves of the Island nation.

The ministry of finance, in New Delhi, said in a statement: Agreement was signed between State Bank of India and Government of Sri Lanka for one billion USD credit facility for procurement of food, medicine and other essential items to Sri Lanka.”

Basil Rajapaksa, during his trip to Delhi, called on Prime Minister Narendra Modi after meeting Finance Minister Nirmala Sitharaman and External Affairs Minister Dr. S Jaishankar. An official statement from the finance minister said issues of mutual interest and economic cooperation” were discussed.

Jaishankar tweeted, Neighbourhood first. India stands with Sri Lanka. USD 1 billion credit line signed for supply of essential commodities. Key element of the package of support extended by India.”

Earlier, India had given $1.4 billion to Sri Lanka, as RBI currency swap and deferral loan, combined with another half a billion line of credit, to help Sri Lanka sustain its fuel imports.

With Sri Lanka facing its worst economic crisis ever, India’s helping hand has come in as a huge relief to resolve the crisis with regard to food and essential items. However, India agreeing to sanction the line of credit and foreign ministry’s statement on neighbourhood, was only to ensure that Sri Lanka doesn’t go the China way.

The long arm of Chinese investments in the infrastructure projects had put Sri Lanka in crisis. The economic observers in Sri Lanka are of the opinion that the Chinese investment are like the big wild elephants which were swallowing the financial reserves because Sri Lanka had to repay the loans given by China.

Economists feel that India is always for a comprehensive economic partnership and will not give anything without being on a white paper. In fact, sources close to Rajapaksa also say that India’s help came only after a very hard try by its finance minister.

Sources in Colombo say that Rajapaksa’s meeting with Modi was finalised only after Sri Lanka agreed for a business investment from a leading corporate company in India. Rajapaksa, as finance minister, has been under much pressure to save the dwindling economy of Sri Lanka.

On Tuesday, hours after he left Colombo to reach Delhi, a massive crowd joined the protest against the Gotabaya Rajapaksa government. Organised by Samagi Jana Balawegaya (SJB), the protest rally was led by opposition leader Sajith Premadasa and others. The protesters who walked past the Shangri La residence of Rajapaksa to picket the Presidential secretariat near Galle Face, were seen wearing headbands saying “Gota Go Home!

Since the beginning of the pandemic in 2020, the Rajapaksas have been trying hard to save the crippling economy, but in vain.

In fact, Basil Rajapaksa, during his earlier trips to India, managed to get loans and financial support. In December 2021, he had held talks with Jaishankar, and both the countries had agreed upon a four-pronged approach to resolve Sri Lanka’s financial crisis. India had then agreed to give credit lines to Sri Lanka for import of essentials such as food, medicines and fuel. It had also agreed for currency swap to help in increasing Sri lanka’s foreign reserves, and modernising the Trincomalee oil tank farm. In 2021, India had sent one lakh kilos of nano nitrogen fertiliser after Colombo has banned the use of contaminated fertilisers.

Even when the new line of credit from India could save the island nation, it is only a temporary solution which will help Sri Lanka purchase food and essential goods. But the country, that is highly dependent on imports and which is seeing its foreign exchange reserves depleting constantly, needs to find a permanent solution. 

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