Sri Lanka signs $500 million credit line for fuel with India

New Delhi: Sri Lanka signed a $500 million credit line with India to import fuel on Wednesday, officials said, as the island nation seeks to stave off rolling power cuts amid a foreign exchange crisis that has hampered purchases of diesel for power plants.

The Export-Import Bank of India (EXIM) will provide the credit line for purchasing petroleum products, India`s High Commission in Sri Lanka`s main city Colombo said on Twitter.

Sri Lanka is struggling with its worst financial crisis in years with reserves hitting $3.1 billion in December. The country has to repay about $4 billion in debt repayments this year.

Rising global oil prices have worsened Sri Lanka`s economic problems with spending on oil imports climbing to about $500 million per month. Sri Lanka and India began negotiations over the credit line to import fuel in August.

Sri Lanka will pay LIBOR+1.25% for the credit line, which will have a one year tenor, and can be subsequently renewed, Energy Minister Udaya Gammanpila told Reuters.

The government hopes to kick off 565,000 metric tonnes of imports from the first week of March and expects six petrol shipments and ten diesel shipments, he said.

"Given the seriousness of Sri Lanka`s reserve situation this credit line will help but it is only increasing our indebtedness and not solving any problems," said economic analyst Murtaza Jafferjee of J.B. Securities.

Sri Lanka is also in talks with Pakistan for a $200 million credit line to buy rice, cement and medicines, Trade Minister Bandula Gunawardena told Reuters.

"We have also started talks with Australia for another $200 million credit line to purchase grains and other staples," he said. "The government`s priority is to maintain reserves to repay our debt but also ensure there are no shortages of goods for citizens."