Sri Lanka has announced plans to send tea to Iran to settle its debt for past oil imports. The barter will help the South Asian country avoid US sanctions for trading with Tehran and save its dwindling foreign currency reserves.

Representatives from the two countries signed a memorandum of agreement affirming that Sri Lanka will clear $251 million in oil import dues to Iran by exporting tea, according to Ramesh Pathirana, head of Sri Lanka’s plantation ministry.

“We hope to send $5 million worth of tea each month to repay Iran for oil purchases pending since the last four years,” the minister said as quoted by Reuters.

The barter won’t “violate any UN or US sanctions since tea has been categorized as a food item under humanitarian grounds while none of the blacklisted Iranian banks will be involved in the equation,” according to the statement issued by the Plantation Ministry.

“The recommended scheme will save Sri Lanka much-needed foreign currency since the settlement to Iran would be made in Sri Lankan rupees through the sale of Ceylon Tea,” it reads.

Severe restrictions against Iranian oil exports were introduced by the US during the Donald Trump administration as part of its “maximum pressure campaign” against the country. The penalties were imposed shortly after Trump pulled the United States out of the 2015 Iran nuclear deal. Washington threatened any country buying crude from Iran with secondary sanctions.

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The swap deal comes amid serious financial challenges faced by Sri Lanka. The country has to meet some $4.5 billion in debt repayments in 2022, starting with a $500 million international sovereign bond due in January. However, its foreign holdings have dropped to $1.6 billion as of the end of November, according to the latest data published by the Central Bank of Sri Lanka.

Earlier this month, Fitch Ratings downgraded Sri Lanka’s sovereign rating to CC from CCC, citing a growing risk of debt default next year. The agency said that the nation has foreign currency debt service payments of $6.9 billion in 2022, equivalent to nearly 430% of its official gross international reserves as of November 2021.

The country’s annual tea production reportedly amounts to about 340 million kilograms. In 2020, Sri Lanka exported 265.5 million kilograms of tea, making it the country’s largest earning crop, worth $1.24 billion last year.

This is the first time the nation has been able to use tea supplies in a barter arrangement to settle foreign debt, according to a senior member of the country’s tea board, as quoted by the agency.

However, a spokesperson for the Sri Lanka Planters Association called the decision a “plaster solution by the government.”

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“It doesn’t necessarily benefit exporters as we will be paid in rupees, circumventing the free market, and provides no real value to us,” Roshan Rajadurai told the media.

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