Sri Lanka has moved closer to securing a crucial $2.9 billion loan from the International Monetary Fund after India extended financing assurances that Colombo needs from its major foreign creditors to get the bailout package.
The IMF loan is critical for the tiny island country to begin a slow recovery process from its worst economic crisis in decades.
Indian External Affairs Minister Subrahmanyam Jaishankar announced that the ministry would facilitate the IMF loan Friday in Colombo, where he met President Ranil Wickremesinghe and other senior Sri Lankan ministers.
“India decided not to wait on others, but to do what we believe is right. We extended financing assurances to the IMF to clear the way for Sri Lanka to move forward,” Jaishankar said in a statement. “Our expectation is that this will not only strengthen Sri Lanka’s position but ensure that all bilateral creditors are dealt with equally.”
India is the first of Sri Lanka’s major creditors to agree to restructuring the country’s debt. Colombo needs the same assurances from China, its largest lender, to clear the way for the disbursement of the loan, which the IMF had agreed to grant in August but which remains contingent on the support of its lenders.
Sri Lankan officials expressed optimism that they will also get Beijing’s backing soon.
“We can say that discussions with China are at the final stage and we expect their assurances in the next few days,” Sri Lanka’s deputy treasury secretary, Priyantha Ratnayake, told reporters. “Once China also gives assurances soon, then Sri Lanka will work to get [IMF] approval as soon as possible.”
Sri Lanka went virtually bankrupt last year as it grappled with severe foreign exchange shortages to pay either for essential imports or its foreign creditors. Since then, it has grappled with runaway inflation of food and fuel prices. It also suspended repayment of $7 billion in foreign debt due last year.
The Indian foreign minister also expressed New Delhi's commitment to increase investment flows to hasten Sri Lanka’s economic recovery.
“India will encourage greater investments in the Sri Lankan economy, especially in core areas like energy, tourism, and infrastructure,” Jaishankar said.
India has extended assistance of about $4 billion since Sri Lanka’s economy sank. “For us, it was an issue of the neighborhood first and not leaving a partner to fend for themselves,” he said.
The two countries are expected to sign a memorandum of understanding for a renewable power project for three islands in Sri Lanka.
Sri Lanka, which will have to implement stringent reforms to get the IMF loan, has raised taxes and tightened government spending. It has also announced deep cuts in its defense expenditure, saying it will slash its army by one third.
Political stability has returned to the country after it was rocked by widespread citizen protests that led to the resignation of former president Gotabaya Rajapaksa, who was widely blamed for the crisis.
The severe fuel and food shortages have also eased and tourists are returning to the county, helping the recovery of its tourist-dependent economy. But the dramatic rise in the cost of living continues to pose a challenge to millions in the country.