Explained: Sri Lanka economic crisis and India's $2.5 billion line of credit | World News - Hindustan Times

Explained: Sri Lanka economic crisis and India's $2.5 billion line of credit

Mar 29, 2022 04:56 PM IST

Sri Lanka economic crisis: India has lent over $2.5 billion in credit so far, in addition to $500 million for a shipment of diesel.

Sri Lanka faces its worst economic crisis in decades. The Mahinda Rajapaksa government is struggling to pay for essential imports after a 70 per cent drop in foreign exchange reserves over two years triggered a currency devaluation. Fuel is in short supply, prices of food and essential goods have increased and protests have broken out as the government preps for talks with the International Monetary Fund amid concerns over its ability to pay $4 billion in foreign debts this year, including a $1 billion international sovereign bond that matures in July.

A worker carries a sack of vegetables towards a truck at the economic center in Dambulla, Sri Lanka February 15, 2022. Picture taken February 15, 2022. REUTERS/Devjyot Ghoshal(REUTERS)
A worker carries a sack of vegetables towards a truck at the economic center in Dambulla, Sri Lanka February 15, 2022. Picture taken February 15, 2022. REUTERS/Devjyot Ghoshal(REUTERS)

Reuters estimates Sri Lanka has only $2.31 billion left in reserves.

The IMF has indicated it stands ready to help. The Sri Lanka government is due to hold talks in April but the global financial body has sounded a warning note. A report released Friday said the island nation faces 'solvency' issues due to risks from unsustainable debt levels.

Sri Lanka received $787 million in pandemic support from the IMF in August.

Sources told Reuters Sri Lanka finance minister Basil Rajapaksa will also meet with World Bank officials next month to seek support from the United States-headquartered agency.

What happened to the Sri Lankan economy?

The crisis is widely seen as a result of mismanagement of government finances and ill-timed tax cuts, in addition to the impact of the COVID-19 pandemic.

The war in Ukraine hasn't helped either; fuel costs surged 40 per cent in a week.

Essentially Sri Lanka is deeply in debt - by some estimates it owes around 119 per cent of its GDP, which means it has borrowed more money than it can produce via goods and services.

Who are Sri Lanka's creditors?

Primary creditors include China and the Asian Development Bank. 36 .4 per cent of Sri Lanka's debt is in international sovereign bonds, with the ADB (14.6 per cent), Japan (10.9 per cent) and China (10.8 per cent) next on the list.

India has already extended a $1 billion line of credit to help Sri Lanka buy fuel, food and medicine. This week Colombo sought an additional $1.5 billion, the governor of that country's central bank told Reuters. 

In addition, $500 million credit has been extended for a shipment of 40,000 tonnes of diesel to tide over the severe fuel shortage in that country.

India has also extended a $400 million currency swap and deferred payment of $515.2 million to the Asian Clearing Union (ACU) by two months.

READ: India extends $1 billion line of credit to Sri Lanka

China has lent billions - as part of its Belt and Road Initiative (BRI) - over the past decade for infrastructure projects like ports and a coal power plant.

Sri Lanka has asked China to restructure debt repayments of about $3.5 billion.

How bad is it?

Bad enough that people are now fleeing Sri Lanka and trying to enter India.

Last week 16 Sri Lankans, including eight children, boarded illegal ferries to India. They were intercepted by the Coast Guard off the Tamil Nadu coast. The state is caring for them but they will almost certainly not be the last refugees.

Reports by Reuters reveal heart-breaking stories from Sri Lanka's less privileged classes, many of whom are now forced to take a second job just to survive.

"We can't survive here anymore," Indika Perera, 43, a security guard at a private company in Colombo, said. Perera now spends over half his salary on groceries for his family but still can't get more than rice once a day for his three children.

READ: Six Sri Lankans caught entering India illegally, trying to flee crisis

The crisis has spawned long queues outside fuel stations - which are now being guarded by soldiers to prevent a riot-like situation.

School exams have been cancelled because of the lack of paper.

On Tuesday, India's foreign minister, S Jaishankar, had to step in to help a Sri Lankan hospital that has suspended surgeries due to lack of medical facilities.

READ: Foreign minister's response to tweet from Sri Lanka - ‘Disturbed….’

How much worse can it get?

Since November, ratings agencies like Moody's, Fitch and Standard & Poor's have all downgraded Sri Lanka on debt default worries.

Fitch estimates Sri Lanka will also need to arrange for $2.4 billion to help state-owned and private firms in the country honour 2022 debt obligations; these will be over and above the $4.5 billion central government debt.

The country also needs around $20 billion for essential imports such as fuel, food and intermediate goods for exports.

What do experts say?

Some experts believe Sri Lanka should establish a three-year repayment structure. Doing so would lessen the burden on Sri Lankan citizens .

"Sri Lanka is unreasonably committed to repaying its debt. It is more prudent to press pause on debt repayment and take care of critical economic needs," Verité Research Executive Director and Economist Dr Nishan de Mel told Reuters.

With input from Bloomberg, Reuters

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