India extends $1 billion credit to Sri Lanka

India extends $1 billion credit to Sri Lanka

Part of: Prelims and GS-II International Relations

Context: India recently extended a $1 billion credit facility to Sri Lanka to assist the island nation through its worst foreign exchange crisis and enable it to procure food, medicines and other essential items. 

• An agreement to this effect was signed between the State Bank of India and the government of Sri Lanka.

Key takeaways 

• In 2022, so far India has extended $1.4 billion support to Sri Lanka, through a $400-million RBI currency swap, postponement of a $0.5 billion loan and another half a billion as a line of credit for the country to sustain its essential fuel imports.

What is the situation in Sri Lanka

• Sri Lanka is facing its worst financial crisis, and had declared an emergency in August 2021 in the face of a crippling foreign exchange crunch. 
• The nation is still facing significant fuel and gas shortages, and high inflation in essential goods. 
• The situation has triggered protests by the political Opposition and citizens’ groups in Sri Lanka.
• The root cause of the crisis was the foreign exchange shortage due to a large $10 billion trade deficit. 
  • Sri Lanka is due to repay foreign debt totalling nearly $ 7 billion this year, amid a persisting shortage of dollars to import food, medicines and other essentials. 
  • It has already sought China’s help to restructure its loans that amount to 10% of its total foreign debt.

What is a credit facility?

• A credit facility is a type of loan. 
• It allows the borrowing party to take out money over an extended period of time rather than reapplying for a loan each time it needs money.

What is Line of Credit (LOC)?

• A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. 
• The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit.

News Source: TH