Colombo: India on Wednesday extended a USD 500 million credit line to Sri Lanka to fund the country’s fuel purchases, the Indian High Commission said, as the island nation struggles to overcome its worst financial and energy crisis in decades.

Last month, the Indian High Commission said that External Affairs Minister S Jaishankar agreed to offer critical support and a USD 500 million credit line in a letter to his Sri Lankan counterpart GL Peiris.

“A friend in need is a friend indeed!! @IndiaEximBank signed the USD 500 million Line of Credit Agreement for purchase of petroleum products with Sri Lanka Treasury today in presence of Honourable Finance Minister @RealBRajapaksa and High Commissioner @MFA Sri Lanka,” the Indian High Commission in Sri Lanka tweeted.

The agreement was signed in the presence of Sri Lankan Finance Minister Basil Rajapaksa and Indian High Commissioner to Sri Lanka Gopal Baglay.

The credit line, which was under negotiations since August 2021, would ease pressure on the country’s dwindling reserves that had dipped to USD3.1 billion by December 2021, according to the Central Bank’s estimates.

Last week, India had also granted Sri Lanka a USD 400 million swap arrangement to boost its reserves.

On Tuesday, Sri Lanka had decided to purchase 40,000 metric tonnes each of petrol and diesel from the Indian Oil Corporation, according to a Cabinet note.

The move came weeks after Power Minister Gamini Lokuge said that Sri Lanka would hold talks with the Indian Oil Corporation’s local entity amid a severe foreign exchange crisis.

The Lanka IOC (LIOC), the Sri Lankan subsidiary of India’s oil major Indian Oil Corporation, has been in operation in Sri Lanka since 2002.

Sri Lanka in the recent weeks has been mulling different options to facilitate measures to prevent fuel pumps from going dry as the island nation faced an acute foreign exchange crisis.

Energy Minister Udaya Gammanpila had predicted fuel shortages in the country due to the inability to pay for imports.

When the crisis loomed, the government approached the IOC’s local operation LIOC to import fuel for the government.

The LIOC had earlier declined the request as they themselves were affected by the shortage of foreign currency to import.

The country is also grappling with a shortage of almost all essentials due to the lack of dollars to pay for the imports.

Additionally, power cuts are imposed at peak hours as the state power entity is unable to obtain fuel to run turbines.

The state fuel entity has stopped oil supplies as the electricity board has large unpaid bills.

The country’s only refinery had to be shut down twice in November 2021, since it was unable to pay for imports.

Last month, the Indian government had announced a billion-dollar assistance package in addition to other balance of payment support to its neighbour.

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