India extends $500 million credit line to Sri Lanka for fuel purchases

The Indian government has decided to delay Sri Lanka's payment of USD 1.5 billion to the Asian Clearing Union, which Sri Lanka owes to India, until further notice.

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Colombo: Despite delays in a rescue deal with the IMF to alleviate Sri Lanka's catastrophic financial situation, India is prepared to give an extra USD 500 million credit line for fuel imports, according to Finance Minister Ali Sabry. Foreign exchange reserves have recently plunged precipitously, leading Sri Lanka to weaken its currency and spiral into inflation.

In a statement on Friday, Sabry stated that India had agreed to offer an additional USD 500 million for fuel imports. He also stated that New Delhi was likely to offer another USD 1 billion credit.

Currently, India has agreed to postpone Sri Lanka's payment of USD 1.5 billion to the Asian Clearing Union, which Sri Lanka owes to India. A USD 400 million exchange that was agreed upon in January of this year was also extended by New Delhi on Friday, according to the Indian High Commission. Sabry is now in Washington, D.C., negotiating a deal with the IMF.

Talks have started on an Extended Fund Facility, according to the Finance Minister, although the finer specifics of the programme have not yet been worked out. International organisations like the World Bank, as well as nations like China and Japan, have been approached by Sri Lanka's finance minister for financial aid.

"The following nine months will be challenging. At this point, the central bank needs to receive additional investments in US dollars. We're in talks with a number of nations. A central bank investment of roughly USD 2 billion, if effective, would assist stabilise the currency and halt its devaluation, according to Sabry.

The Sri Lankan government announced last week that due to the outbreak of the Covid-19 and the war in Ukraine, it would temporarily default on USD 35.5 billion in foreign debt as of April 12.

Massive anti-government demonstrations in Sri Lanka have taken place over the last several weeks, as the country has been hit by food shortages and increasing fuel costs owing to the unprecedented financial crisis.