India bails out Sri Lanka

India bails out Sri Lanka

In what seemed like bailing Sri Lanka out from its imminent economic crisis, Indian Cabinet of Ministers this week gave the nod to provide another 700 million dollar swap to Sri Lanka’s Central Bank.
The facility will be available for three months or until a deal is reached with the International Monetary Fund, India said.
Earlier, Sri Lanka has received a 400 million US dollar currency swap from Reserve Bank of India’s facility for South Asia, taking the total support to the island’s monetary authority to 1.1 billion dollars.
Proceeds of the 400 million dollar three-month swap had arrived in Sri Lanka on 8 March. The swap could be extended.
Sri Lanka borrowed 400 million dollars from RBI’s in 2015 facility for countries in the South Asian Association for Regional Co-operation (SAARC) but repaid it six months later. Each country could borrow from 100 to 400 million dollars from the programme.
On 8 March, a 1.1 billion US dollar swap from RBI expired after being extended for 5 days from 3 March.
Sri Lanka’s foreign reserves came under pressure as excess liquidity and was used up in credit, debt was monetized to finance a sudden surge in election-related spending from January 2015, the Economy Next reported.
Foreign investors also pulled out of rupee bond markets as the currency came under pressure and the credibility of the island’s peg weakened.
The IMF deal is expected to correct the economic imbalances by raising more taxes and tightening policy. Prime Minister Ranil Wickremesinghe has already announced a hike in taxes, which will have to be legislated