Sri Lanka and India are considering the use of the Indian rupee for economic transactions.

In mid-April 2022, the Sri Lankan government declared that it was impossible to pay the country's foreign debt. Since then foreign nations and financial institutions imposed restrictions on financial transactions with the country.

This included the World Bank and the Asian Development Bank that ceased providing new funds. Sri Lanka was also unable to open letters of credit (L/Cs) and its credit rating was downgraded to the point where lending to the country was not advisable.

Indian initiative

The High Commission of India last week organised a discussion with representatives from the Bank of Ceylon, State Bank of India and the Indian Bank on the use of Indian rupee (INR) for economic transactions between India and Sri Lanka.

The representatives said that they had started carrying out INR-denominated trade transactions through respective vostro and nostro accounts after the creation of enabling framework by the two countries' central banks, the Reserve Bank of India and the Central Bank of Sri Lanka in 2022.

Beneficial impacts

The participating banks outlined the benefits of settlements denominated in INR which include shorter timelines, lower exchange costs and easier availability of trade credits.

The beneficial impact of this initiative on the tourism and hospitality industry was also highlighted, including its role in helping increase collections which could be utilised by other sectors.

IMF and L/Cs

Since L/Cs became unavailable, Sri Lanka has experienced many problems such as fuel queues, food shortages and difficulties in procuring medicines, but support from the International Monetary Fund (IMF) may alleviate this situation.

The IMF has approved a US$2.9 billion bailout package for Sri Lanka over four years, pending the country's ability to restructure its debt with creditors, including both bilateral and sovereign bondholders.

With assurances from creditors, the US$2.9 billion facilities could gain approval from the IMF board in March.

The full statement by the High Commission of India on considerations for using the Indian rupee for economic transactions can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.