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IMF Bailout, India to back Sri Lanka’s Debt Restructuring Plan

India will support Sri Lanka’s debt restructuring plan as the island nation looks to trim its huge public expenditure to win approval for a crucial bailout from the International Monetary Fund. India formally notified that it would support Sri Lanka’s debt restructuring plan. Sri Lanka is facing its worst economic crisis since independence from Britain in 1948, and policymakers have been grappling with multiple challenges over the past year including a shortage of dollars, runaway inflation and a steep recession. Sri Lanka owes India around $1 billion that will come under the debt restructuring plan. New Delhi also separately provided Sri Lanka with about $4 billion in rapid assistance between January and July last year, including credit lines, a currency swap arrangement and deferred import payments.

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Need of The Assurances:

New Delhi’s backing comes at a critical time for Sri Lanka as it has to put its massively indebted public finances in order to unlock a $2.9 billion IMF loan that was agreed in September. Sri Lanka has to secure prior financing assurances from creditors, put its heavy debt burden on a sustainable path and increase public revenue before the global lender will disburse the funds. The IMF has stressed the importance of joint talks involving three of Sri Lanka’s main bilateral creditors – China, Japan and India.

Sri Lanka’s Budget Expenditure:

Sri Lanka’s cabinet said that it would cut its recurrent budget expenditure by 6% in 2023 and had approved a proposal to delay salaries of some public employees to manage public finances. The government is hoping to reduce its 2023 budget deficit to 7.9% of gross domestic product, from an expected 9.8% of GDP in 2022, or 2.2 trillion Sri Lankan rupees ($6.03 billion). 

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