Has India agreed to provide a currency swap and trade credit for essential imports? The requested aid from India does not appear to have been finalised yet. The requested aid from India is of crucial importance in the current critical bind in external finances of the country and inability to import essential commodities. However, it [...]

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Will Indian assistance resolve Lanka’s balance of payments crisis?

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Has India agreed to provide a currency swap and trade credit for essential imports?

The requested aid from India does not appear to have been finalised yet. The requested aid from India is of crucial importance in the current critical bind in external finances of the country and inability to import essential commodities. However, it is not a solution to the medium term balance of payments disequilibrium.

Uncertain

At the time of writing this column, it is not clear whether the assistance sought by the Finance Minister on his visit to New Delhi has been granted or whether further negotiations are afoot to secure them. The fact that there has not been any official communiqué from either government implies that the aid package has not been finalised.

Indian visit

According to some media reports, Finance Minister Basil Rajapaksa, who returned to the island from India on December 3 was able to secure financial arrangements to tide over the tight constraints in availability of foreign currency facing the country. However, there has been no official communiqué by either government confirming the agreements arrived at.

This leads to speculation as to whether the aid package is still to be finalised. Are there stringent conditions attached to getting such assistance?

Accountability

Financial accountability and prudence of the Indian government may require Sri Lanka to seek IMF assistance as a condition to provide the aid package. This is especially so with respect to the currency swap. There may also be conditions regarding Indian investments in Sri Lanka that have not been agreed upon.

Imperative

Sri Lanka must obtain adequate financial assistance from India to tide over the perilously low external finances of the country, India’s assistance could end the current shortages of food, drugs, petroleum, gas and other essentials.

Request

Sri Lanka has asked India for a currency swap of US$ 500 million and credit lines for food, fuel and medical imports. These would be essential to rescue the country from her current perilous state of external finances and to resolve the severe shortages of funds to import essential food, drugs and fuel.

Currency swap

The request for a currency swap of US$ 500 million was requested from India some time ago, but has not been forthcoming. India might insist on Sri Lanka agreeing to an IMF bailout package to be certain of our ability to repay Indian loans.

Conditions

We would also have to agree to any conditions that India insists on at this critical juncture in our external finances. We may have to agree to Indian investments in strategic industries and services.

Helpful but inadequate

The Indian aid is a short term palliative that will not resolve the country’s fundamental weaknesses in external finances. The country must look towards a more substantial resolution of the weak external finances to be able to meet her debt repayment obligations of more than US$ four billion in the next 12 months.

As the former Central Bank Governor Indrajit Coomaraswamy pointed out at the Economic Summit in Colombo, it is not only the current balance of payments deficit that must be bridged by sufficient external financing, but also the onerous debt service payments of US$ four billion plus over the next four or five years.

Solution

Dr Coomaraswamy emphasised that we need to have a medium-term solution that addresses this external financing challenge. He underscored the fact that there are no painless options. “We need to work out the path, which gives us the least pain,” he elaborated.

International Monetary Fund (IMF)

Dr. Coomaraswamy pointed out that: “An IMF programme will provide balance of payment (BoP) support. It will also provide direct budgetary support from the World Bank, IDB, ADB and one or two bilateral donors. In addition, the IMF certification makes us more creditworthy; both the public and private sector would be able to tap into international markets easily.”

Economists’ advice

Nearly all economists have advised the Government to seek the assistance of the IMF to overcome the country’s balance of payments crisis and to follow a programme of economic recovery. Among these are Prof. Sirimal Abeyratne, Prof. Prema-Chandra Autukorale, Prof. Sirimevan Colombage, Dr Sarath Rajapatirana and Dr W.A. Wijewardena.

Many other economists and financial analysts too have pointed out that IMF assistance is the least costly and most beneficial. The Government’s advisors think otherwise.

No painless solution

The former Central Bank Governor, addressing the Economic Summit in Colombo said IMF assistance would be the least painful and most advantageous. He said Sri Lanka should consider an IMF programme along with debt restructuring to get over current external stress.

Summing up

The balance of payments crisis has reached such serious proportions that even if we obtain the expected Indian assistance of a currency swap of US$ 500 million and trade credit to import essentials from India these are essential palliatives to overcome the immediate difficulties and not a solution to our balance of payments problem.

Only an IMF programme to restructure our debt and reform our economy could ensure economic stability and growth. In fact, the Indian assistance package is likely on condition that Sri Lanka obtains an IMF facility and agrees to an economic reform programme.

Concluding reflection

It is only a matter of time for the country to seek IMF assistance. The proud boast that we will not go to the IMF on bent knees is unlikely.

IMF assistance is the least costly and most advantageous. The IMF’s conditions would be painful but a necessary condition for economic recovery.

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