India’s exporters are rethinking plans to send shipments to Sri Lanka as state-run companies run out of money and private buyers cancel orders. Without assurances from the government, exports to the island nation are set to shrink from April, exporters say.
Sri Lanka’s economic growth has stagnated due to a cocktail of problems. A major fall in foreign exchange reserves, worsened by the gradual weakening of the Sri Lankan rupee, led to the country being unable to pay back its sovereign debt. It also meant the country was unable to import goods.
“Usually in a crisis such as this, export categories which usually have shipments with high freight-on-board value are the first to be hit. As of now, export of vehicles, engineering goods such as iron and steel, heavy machinery, and electronics have begun to reduce as exporters renegotiate contracts or hold off on shipments,” a senior functionary of the Federation of Indian Export Organisations said.
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He said exporters were further spooked when the Export Credit Guarantee Corporation, which provides credit risk insurance and related services for exports, put Sri Lanka in the Restricted Cover Category-I earlier this week.
“The latest reclassification means exporters sending shipments to Sri Lanka can now borrow from the line of credit only to a limit,” a commerce department official said. The restricted cover is usually valid for one year and is for countries with high domestic political tensions and economic uncertainty.
The government will not reassess Sri Lanka's export cover in the next one to two months because the ECGC remains busy with India’s trade with Russia, the official hinted.
Bilateral trade
Bilateral trade with Sri Lanka stood at $5.9 billion in the first 11 months of 2021-22, up from $4.1 billion in 2020-21. Trade had been rising slowly over the past few years, reaching $6.1 billion in 2018-19 before the pandemic struck.
Most of the trade comprises exports from India. Exports from India stood at $5.2 billion in the last financial year, while imports from Sri Lanka stood at $920 million. Fuels such as petrol and diesel, along with processed petroleum make up the largest chunk of exports at slightly more than $1 billion.
Iron and steel ($380 million), apparel ($327 million), grains such as rice and wheat (cumulative $318 million), cotton ($260 million) and pharmaceuticals ($192 million), are some of the other large export items. Boats and naval equipment worth $480 million have been shipped to Sri Lanka in the current financial year.
Although the Sri Lankan economy had been spiralling downwards, India’s exports to the country continued to flow as Colombo paid for most imports through a line of credit extended by India.
India’s lines of credit comprised $1 billion for imports of food, medicine and essential items and $500 million for petroleum products. The funds have depleted quickly and officials say New Delhi may not announce similar lines of credit soon, or at least until the Sri Lankan government brings in economic reforms.
Going forward
Colombo has repeatedly restructured loans taken from multilateral agencies, while choosing to pay them back through further borrowings from China. However, in early 2022, the situation reached a head whereby uncertainty led to foreign investors draining out funds from the country, the domestic share market collapsing and economic growth tanking further.
Earlier this month, Colombo said it has to repay $8.6 billion of international debt in 2022. Accelerating inflation subsequently has led to nationwide protests, which continue.
“The situation remains fluid and there is little hope that things on the ground will change in the next few weeks. Our diplomatic mission in Colombo is in touch with Indian businesses operating in the country,” a senior official from the Ministry of External Affairs said.
India’s assistance to Sri Lanka included a $400 million Reserve Bank of India currency swap and deferral of a $500 million loan repayment.
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