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Exclusive-Sri Lanka in talks to extend $1 billion Indian credit line as IMF deal looms - sources

International Monetary Fund logo is seen

By Uditha Jayasinghe and Devjyot Ghoshal

COLOMBO (Reuters) - Sri Lanka is negotiating with India to extend a $1 billon credit line by a few months, two sources told Reuters, as the island nation tries to line up funds for the rest of the year while the IMF looks set to approve a $2.9 billion loan for it soon.

The credit line is to due to expire on March 17 with Sri Lanka having used only about two-thirds of it, mainly for medicines and food, said the sources and another person familiar with the matter.

The extension talks come as the economy improves and forex reserves rise for Sri Lanka, where huge protests took place last year amid widespread shortages of essentials after the COVID-19 pandemic hurt tourism and remittances while exposing low tax revenues.

A source at the Sri Lankan Finance Ministry said the government wanted to extend the credit line by 6-12 months because there was about $300 million of it left unused. No agreement had been reached, said the source.

All the sources declined to be named ahead of an announcement.

Sri Lanka's finance ministry and India's foreign ministry did not immediately respond to requests for comment.

Sri Lanka's central bank said on Tuesday the country's official reserves had risen 4.5% to $2.22 billion in February from a month earlier.

President Ranil Wickremesinghe told parliament there were signs the economy was improving but there was still insufficient foreign currency for all imports, making the IMF deal crucial so other creditors could also start releasing funds.

He said China, Sri Lanka's biggest lender, extended support for the IMF programme on Monday, clearing the way for the loan.

The IMF said its board would meet on March 20 to review a preliminary staff-level agreement first signed with Sri Lanka in September. It said Sri Lanka had secured financing assurances from all major bilateral creditors.

China and India are Sri Lanka's biggest lenders and both seek influence on the island located on a busy shipping route on the Indian Ocean.

(Writing by Krishna N. Das, editing by Ed Osmond)