Sri Lanka: India to step up aid as Sri Lanka stares at bankruptcy

India is expected to step up economic aid to Sri Lanka as the country teeters on the brink of bankruptcy and its usable foreign exchange reserves have fallen to less than $50 million.

The new aid could focus on humanitarian needs and both governments are in close contact, ET has learned. The Lankan government has tried to get urea supplies from India. India used to supply fuel, medicines and rice.

Sri Lanka’s cabinet recently approved a proposal to source more fuel from India through a $200 million short-term loan facility from the Exim Bank of India. India has provided nearly $3 billion to Sri Lanka in the form of currency swaps, lines of credit for essentials and loan deferrals since January 2022

Lanka’s bus and rail networks came to a standstill on Friday, while offices and factories stood empty in a nationwide strike demanding the government’s resignation.

Sri Lanka’s economy is in dire straits as its usable foreign exchange reserves have fallen to less than $50 million, the country’s finance minister said on Wednesday.

Finance Minister Ali Sabry addressed Parliament after returning to Sri Lanka from talks with the International Monetary Fund.

He said any IMF bailout program, including a rapid financing tool needed to urgently address shortages of essential goods, would depend on debt restructuring negotiations with creditors and would take six months to implement. The country is scheduled to repay $7 billion this year of the $25 billion in foreign loans it plans to repay by 2026.

Sabry – who resigned on April 4, the day after his appointment, only to return – warned: “We’ve overspent two and a half times”. “In 2021, total revenue was 1,500 billion (Sri Lankan) rupees… expenditure was 3,522 billion rupees… we were living (above) our means…” he said, warning MPs that aid from the World Bank or IMF no profound problems would solve problems.

“The IMF is not Aladdin’s magic lamp,” he said. Last week, the World Bank said it would provide $600 million in aid to help Sri Lanka meet payment requirements for essential imports.

On Thursday, Sabry told parliament that Sri Lanka had lost about 500,000 taxpayers in each of 2020 and 2021 after ill-timed tax cuts. The prolonged and intermittent lockdowns caused by the pandemic prevented the economy from achieving what was originally expected from the tax cuts, Sabry claimed.

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