Sri Lanka, in the grip of a severe economic crisis, benefited from a temporary respite on Wednesday thanks to a $500 million loan granted by India to finance its urgent purchases of petroleum products.
Officials said a formal agreement on a $500 million loan is set to be signed on Wednesday after two weeks of talks. It comes on top of recent Indian foreign exchange aid of $915 million. “The $500 million is earmarked for Sri Lanka to buy petroleum products from Indian supplierssaid an Indian diplomat.
Talks are also underway for a further $1 billion credit line to fund imports of much-needed food and medicines from India, according to the diplomat.
The island of around 22 million people rations electricity and lacks some essential food, but also fuel. Thermal power plants can no longer provide lighting and transport networks are disrupted. Frequent outages at a huge coal-fired power plant have exacerbated the power outages. Households also struggle to find cooking gas and kerosene.
The Islamist attacks of Easter 2019, followed by the Covid-19 epidemic a year later, had disastrous consequences for the island’s economy, which was deprived of its tourist fortune, the main supplier of foreign exchange.
Since then, the government has had to impose drastic restrictions to control its foreign exchange reserves, notably by closing certain diplomatic missions and, most importantly, by banning many imports. However, these measures have also meant that certain economic activities have been restricted, leading to serious bottlenecks. Grocery stores have to ration rice and milk, among other things. Food inflation hit a new high of 25% in January.
Sri Lanka was expecting a rebound in tourism to replenish its foreign exchange coffers, but the highly contagious variant of Omicron coronavirus has dashed those hopes as authorities now expect to welcome just over a million foreign holidaymakers this year.
Since President Gotabaya Rajapaksa came to power in 2019, the country’s foreign exchange reserves have fallen from $7.5 billion to $3.1 billion at the end of December, an amount that could fund imports for just two months.
International rating agencies have downgraded Sri Lanka’s rating amid fears of a default on its $35 billion external debt, around 10% of which was with China.
Sri Lanka is asking Beijing for more loans to pay off its Chinese debt.
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