India as Lender of Last Resort to Sri Lanka in 2022
In the first half of 2022, Indian emergency financing was a critical lifeline
In January 2022, Sri Lanka faced a precarious situation on its external financing. It had $3.1 billion in reserves at end-2021, including an unusable PBOC RMB swap of about $1.5 billion at the time - so effective usable reserves were just $1.6 billion. But CBSL estimated FX repayments obligations of the government and central bank at $6.9 billion for 2022,1 including a $500 million ISB maturing in January itself. In addition it would have to finance a significant current account deficit. With market access not available to raise new FX debt, Sri Lanka needed a lender of last resort that would come through faster than an IMF program.
On cue, India surprised everyone with the magnitude of emergency financing it provided Sri Lanka in the first few months of 2022. First, it provided a $400 million currency swap from the RBI and agreed to a deferment of Asian Clearing Union (ACU) trade liabilities in early January (by year end ACU outstanding increased to $2 billion!). Second, it indicated the provision of trade credit facilities - which would eventually be the $500 million fuel credit line from EXIM Bank of India and $1 billion multi-sector trade credit from State Bank of India. By the second half of the year, India added on the $55 million financing facility for urea fertilizer imports from the EXIM Bank.
All that adds up to close to $4 billion in financing facilities. Below is a breakdown of these facilities and how big they were compared to Sri Lanka’s overall external sector situation.
What’s ACU trade liabilities & how critical was it?
The Asian Clearing Union (ACU) “is a payment arrangement whereby the participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis.” It consists of the seven South Asian countries (excl. Afghanistan) plus Myanmar and Iran. While the transactions occur through the banking system, outstanding net amounts are liabilities of the central banks and cleared on a net basis every 2-months. In effect it allows the participating central banks to reduce the amount of dollar liquidity needed to settle trade between the member countries.2
As the largest economy in the region, India is the largest provider of ACU credit including in the case of Sri Lanka. India is usually the largest or second largest trading partner for Sri Lanka. In 2022, of the $1.74 billion in debit from ACU members, $1.62 billion was to India alone.
Figure 1: Cumulative transactions among ACU members in 2022, USD
While large amounts of transactions are routed through the ACU over the year, because outstanding amounts are repaid every 2 months the outstanding amounts due to ACU members at the end of each year in Sri Lanka’s case has usually been under $600 million during 2012-2021. So, allowing Sri Lanka to first delay repayment of the $523 million due to be repaid in early 2022 and then to increase its outstanding to ACU members to close to $2 billion by mid-2022 was a massive source of external financing at a time Sri Lanka’s usable reserves were near-zero and banks were finding it very difficult to process letters of credit for imports in the 1H 2022. In, essence Sri Lanka was able to defer payment on about $1.5 billion of imports from the region in 2022 and $523 million in imports for 2021, mostly from India.
Figure 2: ACU liabilities payable by Sri Lanka’s Central Bank at end year, USD million3
The importance of this ACU repayment delay is well highlighted when you see that Sri Lanka’s 2022 current account deficit was $1453 million, similar in size to the $1492 million in net increase in ACU outstanding.
The RBI $400 million swap - Reserves lifeline?
Under the Reserve Bank of India’s (RBI) SAARC currency swap arrangement, Sri Lanka has been able to access a $400 million swap facility regularly in recent years, usually for 6-month tenures. The RBI provided this $400 million facility to CBSL in January 2022, but its tenure has continued to be extended. While the then CBSL Governor Cabraal talked of getting larger swaps from Gulf countries in late-2021, the only ones he could access in reality were the PBOC and RBI swaps. Of which only the RBI one was readily usable without constraints.
The decision to keep making external debt repayments during Jan-Mar 2022 meant a significant reduction in the meagre usable reserves left. While $400 million seems quite small, in reality CBSL's usable reserves during much of 2022 was below $400 million, as highlighted in the figure below. In a way it allowed some room till the 12 April 2022 decision to suspend external debt repayments and it also meant that there was some liquid reserves left after April to continue repayments to multilateral lenders, including the IMF. If Sri Lanka was forced into being in arrears to the IMF as well, the process of getting an IMF program could have got delayed further.
Figure 3: Sri Lanka Forex Reserves monthly breakdown, $ million4
$1.555 billion in credit lines - Import lifeline?
With usable reserves reducing, the then government’s policy in late 2021 and early 2022 was to try to negotiate credit lines with major trade partners to ensure essential imports could keep coming into Sri Lanka. Overtures were made to India, Pakistan, China, Gulf oil producers and Australia for credit lines relevant to major imports from these countries.
But eventually only credit lines from India materialized. During 2019-2021 19% to 22% of Sri Lanka’s goods imports came from India5, with major imports including petroleum, iron & steel, fabrics, machinery, sugar, pharmaceuticals, vehicles and other essential food items and inputs into local production (including for exports).
The first of the credit lines made available was the $500 million oil import credit line via the EXIM Bank of India in Feb 2022. According to International Trade Centre (ITC) data, petroleum imports from India was about $605 million in 2021, so it made sense to have access to this credit line.
Sri Lanka’s domestic petroleum fuel sector is dominated by the state-owned Ceylon Petroleum Corporation (CPC) and the smaller presence of the Indian Oil Corporation (IOC). The loss-making and heavily indebted CPC was struggling to open Letters of Credit (LCs) to import oil on credit terms and already had large payments due on 2021 imports. CPC was forced to rely on spot payments for oil shipments coming into the country, but the banking system was struggling to source dollars for these payments and usable reserves of CBSL were also too low to support all oil imports. And the situation was so dire that the $500 million credit line was fully used up by June.
A second credit facility of $1 billion equivalent was provided by State Bank of India (SBI) in March 2022. This was for multiple types of imports and with the first oil credit line exhausted, in May $200 million from this was allocated for oil imports. But this too was exhausted by July. Overall during 2022, $300 million from this SBI credit line was used according to the Ministry of Finance preliminary data. In addition to these, the EXIM Bank also provided a $55 million credit line for urea fertilizer imports to support the Sri Lanka agricultural sector, of which $46 million seems to have been used in 2022.
Therefore, in total these Indian credit lines provided about $846 million in forex financing for imports. These formed a majority of the $875.5 million in loans provided to the Sri Lankan government by India in 2022. This sum accounted for about 38% of total foreign loans & grants disbursed to the government in 2022, a significant increase from India’s typical annual share of loan disbursements to Sri Lanka’s government.6
India’s Lender of Last Resort operation as a whole
Based on the MoF disbursements data and CBSL BOP data, my estimate for overall use of Indian Financing Facilities by Sri Lanka in 2022 is about $3.3 billion. I have included the $523 million in 2021 ACU liabilities repayments deferred since that saved forex reserves, but excluding that the total new financing accessed was about $2.8 billion.
Figure 5 shows that this financing was overwhelmingly used in the first half of 2022, exactly when Sri Lanka was running significant current account deficits and still servicing external debt repayments until 12 April.
Figure 5: Total use of Indian Financing Facilities in each quarter of 2022, $ million
If the new Indian financing (excluding the 2021 ACU liabilities deferred) used is considered as a share of goods imports by quarter, they were about 23% in 1Q and 27% in 2Q.
Figure 6: New Indian Financing Used as a share of Goods Imports by quarter, %
It is possible to see that without this emergency financing, imports could have contracted faster and made the economic contraction faster and deeper in the first half itself. In lieu of this critical role, it is not surprising the Indian credit line loans provided in 2022 have been exempted from debt restructuring according to the IMF staff report. And that means these need to be repaid in the next few years, with some already starting to be repaid.
Figure 7: Sri Lanka Real GDP growth, %
In the second half of 2022, as Indian Financing dried up the Sri Lankan economy was also making the necessary adjustments (depreciation, reducing imports, contracting credit with high interest rates and fiscal consolidation) and no longer making most of its external debt repayments. So, the financing needs reduced and the quarterly current account deficit turned into a small surplus. The use of only $300 million of the $1 billion SBI credit facility,7 available only after Mar 2022, is an indication of these painful adjustments taking effect.
Thanks to
and for the conversations that lead to these articles and for their valuable comments. Hoping to cover Sri Lanka’s overall 2022 current account and balance of payments situation in the next one.This is based on pre-determined net drains for the next 12 months as at end-2021. This includes government external debt repayments, government domestic FX debt repayments and CBSL FX repayments. Of the $6.9 billion in FX repayments about $3.0 billion were to be repaid to domestic creditors.
ACU transactions are denominated in ACU Dollars. Each ACU Dollar is equivalent to one US Dollar. I am not exactly sure about how the clearing of ACU transactions occurs in terms of the banks and central banks. Would appreciate explanations from those familiar with similar regional arrangements.
I am using overall ACU liabilities figure and not the figure specific to India. About 90% of Sri Lanka’s 2022 imports through ACU was from India according to Figure 1. India’s large role in ACU also means that the ACU deferment given to Sri Lanka needs to be driven by India, so its possible to consider the entire ACU liabilities as India facilitated financing.
PBOC swap is denominated in RMB, so the US Dollar value of the RMB 10 billion facility changes over time depending on the RMB-USD exchange rate. One of the conditionalities for it to be usable is for overall official reserves to be equal to or more than 3-months of goods imports.
Based on International Trade Centre data
These credit lines are recorded as government loans because the Treasury is the borrowing party and handles who is able to access and use the credit facilities to import from India in coordination with Indian authorities. The downside of this is that the approval process takes a long time, which could partly explain why only $300mn of $1 billion SBI credit line was used in 2022.
I am using the Sri Lankan Ministry of Finance’s 2022 disbursements data, the Ministry’s Annual Report and CBSL Annual Report which should be out in the next month or so should provide further confirmation on this.