India likely to provide food, medical aid to Sri Lanka as situation worsens

New Delhi: While the embattled Sri Lankan government is in talks with the International Monetary Fund (IMF) to rescue the country's economy, India has assured all help regarding food and medical aid, subject to requests from Colombo, sources in the know have told Moneycontrol.

They said New Delhi has also assured Colombo of its participation in a proposed aid consortium being planned by Sri Lanka with India, Japan, and China.

As a result, Colombo has leaned on its closest neighbour India to secure humanitarian aid if the need arises, which India has assured to provide, he added. "If the need arises, India will ship food packages and other rations to the country as it has done for COVID-related supplies last year or for assistance to Afghanistan in the current year," an official said.

Colombo has repeatedly restructured loans taken from multilateral agencies, while choosing to pay them back through further borrowings from China. However, in early 2022, the situation reached a head whereby uncertainty led to foreign investors draining out funds from the country, the domestic share market collapsing, and economic growth tanking further.

Emergency negotiations are on between Sri Lanka and India for a $1-billion currency swap with the Reserve Bank of India (RBI). However, India has told Sri Lanka that despite the challenges a stable political regime needs to be back in power as soon as possible to ensure smooth bailout talks with the IMF, sources said.

Institutional support

Till date, India has provided around $5 billion worth of assistance to Sri Lanka, of which $3.8 billion has been provided in just 2022. This includes a $400-million currency swap in January, deferral of a $500-million loan repayment, and two lines of credit (LoC) totaling $1.5 billion. An LoC is flexible loan from a financial institution that consists of a defined amount of money that the borrower can access, as needed, and repay either immediately or over time.

The LoC comprised $1 billion for the import of food, medicine, and essential items, and $500 million for petroleum products. The funds have depleted quickly and officials say New Delhi may not announce similar LoCs soon, or at least until the Sri Lankan government brings in economic reforms.

On July 8, the RBI authorised Indian banks to settle all current account transactions, including those related to trade, with Sri Lanka in any permitted currency outside the Asian Clearing Union mechanism. The decision comes into force with immediate effect and will be in effect until further notice, the RBI has said.

The Asian Clearing Union, or ACU, is a payment arrangement between the central banks of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka. Under the ACU, member central banks settle payments for intra-regional transactions on a net basis. This reduces the use of foreign exchange reserves and transfer costs.

Currently, ACU settlements are done in US Dollar, the Euro, and the Japanese Yen.

Dire situation

Sri Lanka has racked up a total international debt of $51 billion. Last month, Colombo said it has to repay $8.6 billion of international debt in 2022. As a result of the country virtually running out of foreign currency in May, Sri Lanka missed its international debt repayment for the first time.

Since then, all imports have nearly come to a stop and massive shortages of fuel, food and everyday supplies have become widespread.

The subsequent fast accelerating inflation hitting as high as 50 percent had led to nationwide protests, which culminated in protestors breaking into the Presidential Palace and Prime Ministerial residence on Sunday and forcing President Gotabaya Rajapaksa to flee.

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