Line of Credit (LOC) to Sri Lanka


    In News 

    • Recently, India extended a $500 million-Line of Credit (LOC) to Sri Lanka for urgent fuel imports, days after providing $900 million relief to the island nation facing one of its worst economic downturns.


    • Sri Lanka is currently facing a severe foreign exchange shortage with falling reserves.
      • This has led to the currency losing value, making imports costly.
    • The country is grappling with a shortage of almost all essentials, including fuel.
    • The state power utilities are unable to run turbines and power cuts are imposed at peak hours.
    • Therefore, Srilanka sought emergency assistance from India to tide over its dollar crunch leading to a shortage of essentials, including fuel, medicines, and certain food supplies.

    Major points 

    • Both countries reviewed a $1.5 billion credit facility to help Sri Lanka augment its fast-draining foreign reserves, crucial to importing essential food items, medicines, and fuel.
      • Of the $1.5 billion, a sum of $500 million was extended for fuel imports.
        • About 20% of Sri Lanka’s annual import expenditure is allocated for oil imports.
    • These measures are in line with India’s commitment to stand with Sri Lanka, contribute to Sri Lanka’s economic growth and impart greater momentum to the bilateral economic and commercial partnership.

    Line of Credit (LOC)

    • It is a credit facility extended by a bank or any other financial institution to a government, business or individual customer.
    • The borrower can access funds from the LOC at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement and meet any other requirements such as making timely minimum payments.
    • It is not a grant but a ‘soft loan’ provided on concessional interest rates to developing countries, which has to be repaid by the borrowing government.
    • The projects under LOCs spread over different sectors like agriculture, infrastructure, telecom, railway, transmission, power, renewable energy etc.

    Brief on India – Sri Lanka Relations 

    • Historical: India and Sri Lanka have a legacy of intellectual, cultural, religious and linguistic interaction and the relationship between the two countries are more than 2500 years old. 
    • Overview  
      • Trade and investment have grown and there is cooperation in the fields of development, education, culture and defence.
      •   In recent years, significant progress in the implementation of developmental assistance projects for Internally Displaced Persons (IDPs) and disadvantaged sections of the population in Sri Lanka has helped further cement the bonds of friendship. 
      • The nearly three-decade long armed conflict between Sri Lankan forces and the LTTE came to an end in May 2009. 
        • During the conflict, India supported the right of the Government of Sri Lanka to act against terrorist forces. 
    • Political Relations 
    • Political relations between the two countries have been marked by high-level exchanges of visits at regular intervals. 
    •  Commercial Relations 
      • Both countries enjoy a vibrant and growing economic and commercial partnership, which has witnessed considerable expansion over the years. 
      • The entry into force of the India-Sri Lanka Free Trade Agreement (ISFTA) in 2000 contributed significantly towards the expansion of trade between the two countries.  
      • In 2020, India was Sri Lanka’s 2nd largest trading partner with the bilateral merchandise trade amounting to about USD 3.6 billion.  
        • India is also one of the largest contributors to Foreign Direct Investment in Sri Lanka.
    • Projects under Lines of Credit 
      • 11 Lines of credit (LOC) have been extended to Sri Lanka by the Export-Import Bank of India in the last 15 years. 
        • Important sectors in which Projects have been executed/ are under execution, under these LOCs include Railway, transport, connectivity, defence, solar.  
    • A US$ 100 million LoC for undertaking solar projects in Sri Lanka has been signed between the Government of Sri Lanka and EXIM Bank in June 2021.  
    • Cultural relations
      • In contemporary times, the Cultural Cooperation Agreement signed by the Government of India and the Government of Sri Lanka in November 1977 forms the basis for periodic Cultural Exchange Programmes between the two countries.  
      • A USD 15 million grant from India for promotion of bilateral Buddhist ties and an inaugural international flight carrying Sri Lankan pilgrims to the sacred city of Kushinagar, after Kushingar’s recent designation as international airport, were announced at the Virtual Bilateral Summit (VBS). 
    • People-to-people ties 
    • Buddhism is one of the strongest pillars connecting the two nations and civilizations from the time when the Great Indian Emperor Ashoka sent his children Arahat Mahinda and Their Sangamitta to spread the teachings of Lord Buddha at the request of King DevanampiyaTissa of Sri Lanka.  
    •  Tourism: Tourism also forms an important link between India and Sri Lanka. The Government of India formally launched the e-Tourist Visa (eTV) scheme for Sri Lankan tourists on 14 April 2015. 
    • Human resource development: India now offers about 710 scholarship slots annually to Sri Lankan students. 
      • In addition, under the Indian Technical and Economic Cooperation (ITEC) Program, India offers 402 fully-funded slots every year to officials in various Ministries of Government of Sri Lanka and also to other eligible citizens for short term training programs in a wide variety of technical and professional disciplines to enhance skill sets.
      • Indian institutes under the ‘Study in India’ Program provide technical expertise across a diverse range of courses and include programs in niche disciplines such as Ayurveda, Yoga, and Buddhist Studies. 
    • Defence :
      • India and Sri Lanka conduct a joint Military exercise named  ‘Mitra Shakti’ and a Naval exercise named SLINEX.    

    Issues between the two nations:

    • Fishermen issue: Given the proximity of the territorial waters of both countries, especially in the Palk Straits and the Gulf of Mannar, incidents of straying of fishermen are common. 
    • China’s increasing closeness to Sri Lanka is a matter of concern for India. It poses a threat to India’s regional security concerns.

    Way Forward 

    • The need for national reconciliation through a political settlement of the ethnic issue has been reiterated by India at the highest levels. 
    • India is in favour of a negotiated political settlement, which is acceptable to all communities within the framework of a united Sri Lanka and which is consistent with democracy, pluralism and respect for human rights. 
    • Indian Government should ensure assistance to the states so that fishermen can find alternative livelihoods to fishing in Palk Bay.