India offered a new $500 million credit line to Sri Lanka to fund fuel purchases, the Indian High Commission in Colombo said on Tuesday, as the island struggles to manage its worst financial crisis in years.
The credit line, which was under negotiation since August 2021, will ease pressure on the country's dwindling reserves that dipped to $3.1 billion at the end of December.
Last week India also granted Sri Lanka a $400 million swap arragement to boost its reserves and help repay debt.
The international rating agencies had expressed doubts over the island nation's ability to meet its international sovereign bond payments of $1.5 billion, including the first $500 million which matured on Tuesday.
The settlement of these bonds, issued in 2012, came despite calls from the business fraternity, economic analysts and opposition politicians to defer the payment in view of the severe foreign exchange crisis.
They opined that the nation's foreign currency reserves should be used to pay for the imports of essentials. Shortages of food and essentials are prevailing due to scarcity of foreign exchange. Shipments are getting held up at the port, while power cuts are imposed as the energy sector has been hit due to the forex crisis.
The next bond payment amounting USD one billion is due in July. The total debt owed by Lanka this year is over $6 billion.
In his address to Parliament in the morning, President Gotabaya Rajapkasa admitted that the most serious challenge his government is facing is the economic management in the current foreign exchange crisis.
“Today we are encountering the climax of a problem for which a number of governments have failed to provide a lasting solution...More than $6 billion a year in foreign debt is to be repaid over the next two years. It is the loans taken by all previous governments from time to time that we have to repay," he said.
Last week, Rajapkasa had urged visiting Chinese foreign minister Wang Yi to restructure China's debt to Sri Lanka as a favour. Over $2 billion are due to be paid to China in 2022.
Lanka's economy shrank 3.6 per cent last year due to the coronavirus pandemic that adversely affected tourism earnings, a major forex earner.
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