Sri Lanka announces USD 1 billion economic relief package; says won't default on debt

Colombo: The Sri Lankan government on Tuesday announced a USD 1.2 billion economic relief package amidst a severe foreign exchange crisis even as Finance Minister Basil Rajapaksa claimed that the country will not default on its international debt despite the projection of rating agencies about its inability to meet the obligations.

Sri Lanka would duly pay the USD 500 million international sovereign bond payment due in a fortnight, Finance Minister Rajapaksa told reporters here.

He said that 229 billion Sri Lankan rupees (USD 1.2 billion) would be spent to accommodate the new economic relief package which includes, among other measures, a special allowance of Rs 5,000 (USD 24) per month to 1.5 million government employees, pensioners and differently-abled soldiers from January 2022.

On the question of the country's debt obligations, the minister said that the International Sovereign Bond (ISB) holders would be invited to renegotiate.

We have to repay USD 1,000 million in July, they will be asked if they would be willing to reinvest, Rajapaksa, the younger brother of Prime Minister Mahinda Rajapaksa and President Gotabaya Rajapaksa, said.

We have high debt from three countries -- China, Japan and India. The total outstanding for this year would be USD 6.9 billion, the minister said.

Rajapaksa said that farmers, who face a crop reduction by about 25 to 30 per cent this harvesting season, would be offered subsidies.

People owning land below one acre would be given 10,000 rupees (USD 49) subsidy to cultivate food crops, Rajapaksa said.

For the plantation sector employees, each family would be given 15 kgs of wheat every month, he said.

Agriculturists have warned that the island would be facing a severe food shortage due to import controls over the foreign exchange crisis and a government decision to ban chemical fertilisers.

The government has faced public protests over the high cost of living and worries in the farming community due to the loss of harvest caused by the chemical fertiliser ban.

Inflation hit double digits in November, the highest in 13 years.

Rajapaksa said that the relief package will not contribute to further inflation as all expenditure will be within the budget.

There won't be any new taxes or anything, he assured.

Rajapaksa said the government has not made any decision yet to seek a bailout package from the International Monetary Fund (IMF).

Sri Lanka is currently facing a severe foreign exchange crisis with falling reserves.

At the beginning of December, the reserves were sufficient for just a month of imports.

In November, the island nation's only refinery was ordered to be shut due to the dollar crisis. The government has opted to import finished petroleum products instead.

The government said negotiations are underway with India and Oman to work out credit lines for fuel purchases.

Recently, New-York based rating agency Fitch downgraded Sri Lanka's sovereign rating to 'CC' from 'CCC', saying there is an increased probability of a default in coming months in light of the country's worsening external liquidity position underscored by a drop in foreign exchange reserves.

The rating agency said it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.

Fitch said Sri Lanka's foreign-exchange reserves have declined much faster than it expected, owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka.

Foreign exchange reserves have declined by about USD 2 billion since August, falling to USD 1.6 billion at end-November, equivalent to less than one month of current external payments (CXP). This represents a drop in foreign-currency reserves of about USD 4 billion since end-2020, it said.

The latest Fitch statement came after the finance minister assured Parliament last month that the government was confident of meeting external debt payments when they fall due.

In order to tackle the reserves crisis, Sri Lanka has curtailed imports leading to shortages of essentials.