ECONOMYNEXT – Sri Lanka’s Finance Minister Basil Rajapaksa will visit India soon to wrap up credit lines worth a billion US dollars, State Minister for Samurdhi and micro finance Shehan Semasinghe said.

“We are ready to enter into several agreements with India for financial facilities worth a billion US dollars,” Minister Semasinghe told parliament.

“We have made arrangement for the Finance Minister to visit India within a very short time to discuss this.”

India is expected to give credit lines worth a billion US dollars to Sri Lanka to import food and medicines.

Sri Lanka is in a severe foreign exchange crisis, due to money printed to maintain artificially low interest rates as budget deficits expanded and the private credit recovered from a Coronavirus crisis.

Sri Lanka has faced forex crises, since a money printing central bank was set up in 1950, and has engaged in failed Mercantilist solutions solve monetary instability without brining laws to restrict the discretionary powers of a soft-pegged central bank to manipulate interest rates.

Everytime money is printed, injecting excess demand to the domestic economy, which spills over to the balance of payments, credit lines and loans are taken to import oil in particular.

India is expected to sign a 500 million US dollar credit line for oil in April. India has already given a 400 million US dollar swap to the central bank and deferred payments on a regional clearing arrangement.

The Mercantilists then complain that the external current account deficit is widening.

Sri Lanka frequently goes to the International Monetary Fund, which force the country to raise rates, reduce the deficit, and float the currency but no lasting solution in the form of central bank restraint is done, making the country get into forex trouble as soon as credit economy recovers in the next cycle. (Colombo/Feb25/2022)