TK Arun

A rupee line of credit would give immediate relief to Sri Lankans and their interim President while letting India help the island nation without depleting its own dollar reserves.

Now that Sri Lanka has gained respite from its protracted political crisis and secured an official leader to head the government, the country can enter into talks with the International Monetary Fund to obtain funding to stabilize the economy. But that will entail extended negotiations that take time, and also invite some bit of political opposition from those who want to believe that approaching the IMF for a loan is to surrender national sovereignty.

For Sri Lanka to be able to restructure the entirety of its external payment obligations, it has to strike a deal with the Fund, sooner or later. In the interim, the government of India should offer Colombo a line of rupee credit that can be utilized to buy essential fuel, food, and medicines from India, the purchase being paid for in rupees. India’s new facility for settling cross-border trade in rupees will come in handy for Sri Lanka.

It is the kind of proposition that, in Chinese diplomatic lingo, would be called win-win. Both sides have much to gain. Ranil Wickremesinghe is an unpopular interim president chosen by the legislature and deeply distrusted by the people, who had, after all, given his party just enough votes for it to secure one seat in the present legislature.

Because of a system of proportional representation, Wickremesinghe could find his way into Parliament as his party’s nominee, even though he had lost his own seat in the polls. Wickremesinghe needs to show some quick results on the ground to forestall the resumption of serious protests on the streets of Colombo. Importing much-needed food, medicines, and fuel to get Sri Lanka moving and working again would be the most telling sign of his efficacy.

For New Delhi, with the rupee’s exchange rate against the dollar having come to acquire the characteristics of a symbol of national virility, thanks to past political campaigns that portrayed the rupee’s depreciation as a sign of the nation’s decline under the government then in office, it is far simpler to offer foreign assistance in rupees than to dip into the nation’s foreign exchange reserves, however ample, to proffer external aid. That insulates playing the friendly, big-hearted brother in the region from any risk of wilting national machismo.

India is in a position to supply most of what Lankans desperately need to import. Take food. Lankans are rice eaters, whose cuisine resembles that of Kerala. They number only 22 million, as much as the population of India’s National Capital Region. The rice needed by that population to feed itself for some weeks is something that India not just can spare but would be happy to see coming out of its excess stocks with the Food Corporation of India. Wheat is something that India would not like to sell to foreigners at the moment. It is only when it comes to cooking oil that India would be unable to meet Lankan needs from its own supplies.

India is a traditional supplier of petroleum fuels to Lanka and can meet the entirety of Lankans’ pent-up demand for diesel and petrol, with payments received from a rupee line of credit. And that goes for most medicines, too.

Would such a scheme leave Indian exporters shortchanged? Not in the least. Exporters might earn in dollars, but are obliged, by RBI regulation, to swiftly convert their export earnings into rupees. So, it matters little to them whether they export for dollar payments or for rupee payments. The government should ensure that all the exports in exchange for rupee payments receive all the extra benefits that exporters receive when they export against dollar payments, whether duty drawback, export credit, or payments in lieu of embedded taxes in the export value. That is all.

Care must be taken to prevent any hint of India’s exporters taking advantage of Sri Lanka’s distress to charge higher prices than they would in other export markets. Quality must be on par with other exports, too. It is vital to ensure that bilateral rupee trade does not become a source of public resentment against Indian exploitation. The dominant power of a region always runs the risk of being seen to be unfair to its smaller neighbors. India must avoid this odious reputation.

Rupee trade is not a one-way street. Sri Lanka might want to export to India, and receive payments in rupees, with which to pay off the rupee debt incurred by way of this emergency line of credit. That is one way of hedging against the currency risk involved in receiving payments in dollars and repaying the rupee debt later.

India does import coffee, tea, spices, and animal feed inputs, among other things, from Sri Lanka. Indian tourists spend money in Sri Lanka, and assorted Indian companies invest in Sri Lanka, ranging from Indian Oil Corporation to ITC. It should be up to Sri Lanka how much of this it wants to receive in Indian rupees and how much in dollars. India’s line of credit should offer total flexibility on such matters.

It is in Sri Lanka’s interest to let the rupee surplus in bilateral trade, along with the rupee repayment obligation, be used for investment by Indian entities in Sri Lanka, at the market-determined exchange rate between the currencies of the two countries. The trade surplus and the rupee repayment obligation would belong to India’s state sector. The government could sell chunks of these to would-be Indian investors in Sri Lanka in exchange for Indian rupees paid in India. That would take additional chunks of cross-border economic activity outside the domain of the dollar while depleting Sri Lanka’s repayment obligation to India.

This article was first published in MoneyControl as India must extend a rupee line of credit to Sri Lanka on July 21, 2022.

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About the Author

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TK Arun is a Senior Journalist and Renowned Columnist based in Delhi.