India has informed the International Monetary Fund (IMF) that it will support Sri Lanka’s debt restructuring plan, a source with direct knowledge of the matter said, as the island nation struggles to secure a $2.9 billion bailout from the global lender.
The country of 22 million is facing its worst economic crisis since independence from Britain in 1948, and policymakers have faced multiple challenges in the past year, including a dollar shortage, runaway inflation and a steep recession.
“India has sent a letter to the IMF,” the source told Reuters, asking not to be named because they are not authorized to speak to the media.
A spokesman for India’s finance ministry declined to comment. Sri Lanka’s finance ministry did not immediately respond to a request for comment.
Sri Lanka needs the support of China and India – its biggest bilateral lenders – to reach a final deal with the IMF on the $2.9 billion loan needed to revive its struggling economy.
“We are working to get our economy on the right track,” President Ranil Wickremesinghe told parliament on Tuesday.
“Now we have to get India and China to agree on debt restructuring. These discussions are ongoing and so far they have been successful.”
The two Asian giants, who have been vying for influence in Sri Lanka for decades, are also the island nation’s biggest trading partners, accounting for about $5 billion each in bilateral trade in 2021.
Sri Lanka owes India about $1 billion that will go into the debt restructuring plan, the source said.
New Delhi separately provided Sri Lanka with about $4 billion in fast-track aid between January and July last year, including lines of credit, a currency swap agreement and deferred import payments.
Sri Lanka owed Chinese lenders $7.4 billion – nearly a fifth of its public external debt – by the end of last year, according to calculations by the China Africa Research Initiative (CARI).
Japan is Sri Lanka’s third major bilateral lender, and Colombo needs prior financing agreements with all three countries to seek IMF board approval for a four-year program with the lender.
“We hope to finalize the support from the IMF in the first quarter of 2023,” Sri Lankan cabinet spokesman Bandula Gunawardana told reporters on Tuesday.
Sri Lanka must secure earlier assurances of funding from creditors, put its heavy debt burden on a sustainable path and raise public revenues before the global lender disburses the funds, the IMF said.
The IMF has highlighted the importance of joint talks involving three of Sri Lanka’s main bilateral creditors – China, Japan and India.
Sri Lanka’s cabinet said on Tuesday it will cut its recurrent budget expenditure by 6% in 2023 and approved a proposal to delay the salaries of some civil servants to manage public finances.
($1 = 365.0000 Sri Lankan rupees)