India will support Sri Lanka’s debt restructuring plan, Bloomberg News reported on Tuesday, as the island nation looks to trim its huge public expenditure to win approval for a crucial bailout from the International Monetary Fund.
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.
India formally notified on Monday that it would support Sri Lanka’s debt restructuring plan, Bloomberg reported on Tuesday, citing a source with knowledge of the matter, adding an announcement could come later in the day.
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.
“Talks with bilateral lenders including India and China to restructure Sri Lanka’s debt are progressing well and we are hopeful of finalizing support from the IMF in the first quarter of 2023,” Sri Lanka’s cabinet spokesperson, Bandula Gunawardana, told reporters on Tuesday.
A spokesperson for India’s finance ministry declined to comment. Sri Lanka’s finance ministry did not respond to a request for comment.
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 said.
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 cabinet said on Tuesday 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.
“Under successive governments Sri Lanka has printed money to bridge the gap between public revenue and expenditure, but due to the financial crisis and our attempts to get support from the IMF there are restrictions to print money, so the only option is to reduce expenditure,” Gunawardana said.
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).