World Bank extends interest-free $495 mn to SL as IDA-eligible nation

Colombo (LNW): Sri Lanka has been granted budget support loans totaling US $495.6 million by the World Bank (WB), with an interest-free arrangement until September 2023.

This financial assistance comes after the country’s downgrade made it eligible for reduced-rate International Development Association (IDA) credits, reported Economy Next.

The WB has committed to providing development policy financing, disbursed in connection with policy reforms, on an interest-free basis, with a nominal commitment fee of 0.5 per cent.

The repayment terms include a generous 6-year grace period and a 12-year repayment period through the IDA window, a Finance Ministry report outlined.

Additionally, the WB has earmarked US $196.3 million for social protection initiatives, carrying an interest rate of 1.25 per cent, a service fee of 0.75 per cent, and a commitment fee of 0.5 per cent. The repayment schedule for this allocation spans 30 years, with a 5-year grace period.

In 2022, Sri Lanka faced economic challenges, with a sharp depreciation of its currency, leading to a significant portion of the population falling into poverty. The currency’s float, initially unsuccessful due to a surrender rule, saw subsequent corrective measures, including interest rate hikes and the removal of the surrender rule, resulting in the rupee appreciating to approximately 320-330 against the US dollar.

Sri Lanka, having attained middle-income status and market access for International Bank of Reconstruction and Development (IBRD) loans, experienced a shift in its economic landscape with aggressive macro-economic policies.

The country lost market access and defaulted on foreign loans, prompting the World Bank to extend IDA loans to Sri Lanka.

While loans from multilateral agencies such as the World Bank and Asian Development Bank are generally concessional, the expectation remains that these loans are serviced even in the event of default.

The WB adheres to a policy of providing favorable loan terms with extended repayment periods, ensuring a net positive flow of new loans compared to repayments, according to a senior official.

Sri Lanka’s default on foreign loans in 2022 resulted from a series of currency crises triggered by excessive money printing to target potential output through macro-economic policies.