Sri Lanka says India, World Bank consider $2 billion bridge finance

Sri Lanka’s finance minister said that its neighbour India and the World Bank are considering extending about $2 billion in bridge finance so it can continue essential imports.

The country of 22 million people is struggling to pay for imports after a sharp drop in foreign exchange reserves which has led to a currency devaluation and soaring inflation.

Sri Lanka, which has $51 billion of external credit, is working on a wider plan to secure funds to help it through its worst economic crisis, with prolonged power cuts and shortages of fuel and medicines that have sparked nationwide protests.

The government has asked some creditors to restructure its debt and also approached China, Japan, and the Asian Development Bank amongst others for help, Ali Sabry said.

India has already agreed to double an existing $500 million credit line for fuel and defer about $1.5 billion in import payments that Sri Lanka needs to make to the Asian Clearing Union. It has also extended the tenure of a $400 million swap given in January, the Indian High Commission said on Friday.

“Talks with the World Bank have also been very positive,” Sabry said, adding: “In the next four weeks to six months we expect about $500 million from them, which will be partly used to provide direct cash transfers to the poor”.

Sabry is in Washington leading a Sri Lankan delegation to negotiate a programme with the International Monetary Fund (IMF). He said talks had started on an Extended Fund Facility (EFF) but Sri Lanka was in need of $3 billion to $4 billion in bridge financing till a programme is finalised.

“We have a three-pronged strategy. One is to get an IMF programme going, second to secure bridge financing and third to get Sri Lanka back on a growth trajectory in a year or so,” he said.

Sabry said the government hopes to appoint financial advisers and an international law firm to start formal debt negotiations with creditors in the next 10 to 15 days.

Meanwhile crisis-hit Sri Lanka’s inflation hit a record high for the sixth consecutive month, official data showed on Friday as the government asked the IMF for an urgent bailout.

The broad-based National Consumer Price Index (NCPI) rose 21.5 per cent year-on-year in March, more than four times the 5.1 per cent inflation of a year earlier.

Food inflation in March stood at 29.5 per cent, according to the latest data from the Department of Census and Statistics.

The figures are likely to rise further: the state-run oil company has subsequently raised the price of diesel, commonly used in public transport, by 64.2 per cent. The worsening economic crisis has led to clashes at nationwide demonstrations calling on President Gotabaya Rajapaksa to step down over mismanagement and corruption.

Sri Lanka asked the International Monetary Fund this week for emergency assistance, but was told that the South Asian nation’s $51 billion external debt was “unsustainable” and must be “restructured” before any help.

“When the IMF determines that a country’s debt is not sustainable, the country needs to take steps to restore debt sustainability prior to IMF lending,” the Fund’s country director Masahiro Nozaki said in a statement on Wednesday.

“Approval of an IMF-supported programme for Sri Lanka would require adequate assurances that debt sustainability will be restored.”

The government has announced a default on its foreign debt and said precious foreign exchange will be reserved to finance essential food and medicines.

Police clashed with protesters in central Sri Lanka on Tuesday, killing one of them and wounding nearly 30.

At least eight people have also died waiting in long lines for fuel in the past six weeks. The country’s foreign exchange shortage has led to a slowing down of imports, including essentials.

Shops have rationed the quantity of rice, milk powder, sugar, lentils and tinned fish sold to consumers. Sri Lanka’s economy has collapsed since the onset of the pandemic, with a nosedive in tourism revenue as well as foreign worker remittances.

Meanwhile, with its ancient fort and sandy beaches, the city of Galle on Sri Lanka’s southern coast should be awash with holidaymakers at this time of year.

Instead, another power cut has plunged the city into darkness, and the historic quarter lies mostly deserted except for a lone tourist using a flashlight to find his way along the pitch black street.

As Sri Lanka sinks deeper into its worst economic crisis since independence, hopes in Galle that it could once more become the booming tourist destination it was before COVID-19 halted global travel in 2020 have been dashed.

Power cuts and essential food shortages have hit the island nation hard for weeks, drawing out protesters onto the streets and putting President Gotabaya Rajapaksa under mounting pressure to resign. On Tuesday, one person died in a protest, the first fatality since the demonstrations began last month.