India’s economic package has given a breather to Sri Lanka, which must seek IMF bailout, says leading economist

India’s financial package has prevented Sri Lanka from sliding into a major economic slump for now, leading economist WA Wijewardena said on Saturday, but warned that Gotabaya Rajapaksa’s regime should seek an immediate bailout from the IMF to deal with the change. shortage in the country. India on Thursday announced a $900 million loan to Sri Lanka to replenish its depleted foreign exchange reserves and for food imports, amid a shortage of nearly every basic commodity in the island nation.

Indian High Commissioner to Sri Lanka Gopal Baglay met with Central Bank Governor Ajith Nivard Cabraal and “expressed India’s strong support to Sri Lanka following RBI’s grant of more than 900 million dollars last week”.

“These include the postponement of the Asian Clearing Union settlement of over $509 million and a currency swap of $400 million,” the Indian High Commission’s tweet read.

“India’s economic package averted an immediate economic crisis after the settlement of international sovereign bonds due on January 18. The $400 million swap has helped to improve gross reserves to some extent. Indian credit of $1.5 billion will also alleviate shortages of essential commodities via imports from India,” said Wijewardena, the former deputy governor of the Central Bank of Sri Lanka.

Wijewardena said India’s timely assistance has given the Sri Lankan government two months of breathing space, the time during which tough economic reforms need to be implemented and an International Monetary Fund (IMF) bailout is needed to a permanent solution.

“India’s intervention has helped Sri Lanka, but they can’t bail us out. While we have to honor the promises made to India to realize the gains. In the meantime, we have to seek help from the IMF “, he asserted.

Wijewardena’s comments came on the heels of External Affairs Minister S Jaishankar and Sri Lankan Finance Minister Basil Rajapaksa who hosted a vast virtual meeting on Indian economic aid to Sri Lanka on Saturday.

During the meeting, Jaishankar indicated that India has always stood by Sri Lanka and will continue to support the country in every possible way to overcome the economic and other challenges posed by the COVID-19 pandemic, a statement issued by the Department of External Affairs. noted.

As close friends and maritime neighbours, India and Sri Lanka stand to gain from closer economic ties, Jaishankar said during the virtual interaction.

The issue of an IMF bailout has been contentious, an issue that has deeply divided the Sri Lankan cabinet.

Sri Lanka’s gross domestic product contracted by a record 3.6% in 2020 and its foreign exchange reserves more than halved in the year to July to just $2.8 billion.

This has caused the Sri Lankan rupee to depreciate by more than 9% against the US dollar over the past 12 months, making imports more expensive.

The island nation is also facing a severe currency crisis after the pandemic hit the country’s income from tourism and remittances.