Bangla-Lanka currency swap
29/05/2021

Tags:

Context:

  • Bangladesh’s central bank has approved a $200 million currency swap facility to Sri Lanka.

What is the arrangement?

  • Bangladesh’s central bank has in principle approved a $200 million currency swap agreement with Sri Lanka.It will help Colombo tide over its foreign exchange crisis.
  • Sri Lanka, staring at an external debt repayment schedule of $4.05 million this year, is in urgent need of foreign exchange. Its own foreign exchange reserves in March year stood at $4 million.
  • The two sides have toformalise an agreement to operationalise the facility approved by Bangladesh Bank.

What is a currency swap?

  • In this context, a currency swap is effectively a loan that Bangladesh will give to Sri Lanka in dollars, with an agreement that the debt will be repaid with interest in Sri Lankan rupees.
  • Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.
  • Sri Lanka, this is cheaper than borrowing from the market, and a lifeline as is it struggles to maintain adequate forex reserves even as repayment of its external debts looms.
  • The period of the currency swap will be specified in the agreement.

Unusual for Bangladesh:

  • Bangladesh has not been viewed so far as a provider of financial assistance to other countries. It has been among the most impoverished countries of the world, and still receives billions of dollars in financial aid.
  • But over the last two decades, its economy has pulled itself up literally by the bootstraps, and in 2020, was the fastest growing in South Asia.
  • The country has managed to pull millions out of poverty. Its per capita income just overtook India’s.
  • This may be the first time that Bangladesh is extending a helping hand to another country, so this is a landmark of sorts.
  • It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.

India-Sri Lanka

  • Last year, Sri Lankan President knocked on Indian Prime Minister’s door for a $1 billion credit swap, and separately, a moratorium on debts that the country must repay to India.
  • But India-Sri Lanka relations have been tensed over Colombo’s decision to cancel a valued container terminal project at Colombo Port.
  • Earlier, in July 2020, the Reserve Bank of India (RBI) extended a USD 400 million credit swap facility to Sri Lanka, which the Central Bank of Sri Lanka settled in February. The arrangement was not extended.
  •  With the tourism industry destroyed since the 2019 Easter attacks, Sri Lanka had lost one of its top foreign exchange pullers even before the pandemic.
  • The tea and garment industries have also been hit by the pandemic affecting exports. Remittances increased in 2020 but are not sufficient to pull Sri Lanka out of its crisis.
  • The country is already deep in debt to China. In April, Beijing gave Sri Lanka a $1.5 billion currency swap facility.
  • Separately, China, which had extended a $1 billion loan to Sri Lanka last year, extended the second $500 million tranche of that loan. According to media reports, Sri Lanka’s owes China up to $5 billion.

RBI framework

  • Last July, the Reserve Bank of India did extend a $400 million credit swap facility to Sri Lanka, which Central Bank of Sri Lanka settled in February. The arrangement was not extended.
  • RBI has a framework under which it can offer credit swap facilities to SAARC countries within an overall corpus of $2 billion.
  • According to RBI, the SAARC currency swap facility came into operation in November 2012 with the aim of providing to smaller countries in the region “a backstop line of funding for short-term foreign exchange liquidity requirements or balance of payment crisis till longer term arrangements are made”.
  • The presumption was that only India, as the regional group’s largest economy, could do this. The Bangladesh-Sri Lanka arrangement shows that is no longer valid.
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