Explained: what the Bangla-Lanka currency swap means
Bangladesh’s central bank has approved a $ 200 billion currency swap facility in Sri Lanka. What does this mean and why is it important?
What’s the arrangement?
Bangladesh Bank, the central bank of Bangladesh, has in principle approved a $ 200 million currency swap deal with Sri Lanka, which will help Colombo weather its currency crisis, according to Bangladesh media, citing the holder. word of the bank.
Sri Lanka, which is considering a $ 4.05 million external debt repayment schedule this year, is in dire need of foreign exchange. Its own foreign exchange reserves in March stood at $ 4 million.
The two parties must formalize an agreement to operationalize the facility approved by the Bangladesh Bank. Dhaka decided to expand the facility after a request from Sri Lankan Prime Minister Mahinda Rajapaksa to Prime Minister of Bangladesh Sheikh Hasina.
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What is a currency swap?
In this context, a currency swap is actually 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. For Sri Lanka, this is cheaper than borrowing in the market, and a lifeline as it struggles to maintain adequate foreign exchange reserves even as repayment of its external debts looms. The period of the currency swap will be specified in the agreement.
Isn’t it unusual for Bangladesh to do this?
Bangladesh has so far not been viewed as a provider of financial assistance to other countries. It has been among the poorest countries in the world and still receives billions of dollars in financial aid. But over the past two decades, its economy has literally shot up by bootstraps and, in 2020, experienced the fastest growing in South Asia.
Bangladesh’s economy grew 5.2% in 2020 and is expected to grow 6.8% in 2021. The country has successfully lifted millions of people out of poverty. Its per capita income has just exceeded that of India.
This may be the first time that Bangladesh has extended a helping hand to another country, so it is kind of a landmark.
Bangladesh’s foreign exchange reserves in May stood at $ 45 billion. In 2020, despite fears that the pandemic could affect remittances, Bangladeshis living abroad sent more than $ 21 billion. It is also the first time that Sri Lanka has borrowed from an ASACR country other than India.
Why hasn’t Sri Lanka approached India, the region’s largest economy?
He did, but did not get a response from Delhi. Last year, President Gotabaya Rajapaksa knocked on Prime Minister Narendra Modi’s door for a billion dollar credit swap and, separately, a moratorium on the debts the country must repay to India. But relations between India and Sri Lanka have been strained following Colombo’s decision to cancel a major container terminal project at the port of Colombo.
India has postponed its decision, but Colombo no longer has the luxury of time. With the tourism industry destroyed since the 2019 Easter attacks, Sri Lanka had lost one of its main currency 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 enough to pull Sri Lanka out of its crisis.
The country is already heavily indebted to China. In April, Beijing granted Sri Lanka a $ 1.5 billion currency swap facility. Meanwhile, China, which provided a $ 1 billion loan to Sri Lanka last year, provided the second $ 500 million of the loan. Sri Lanka owes China up to $ 5 billion, according to media reports.
What about last year’s credit swap facility that India granted to Sri Lanka?
Last July, the Reserve Bank of India granted a $ 400 million credit swap facility to Sri Lanka, which the Central Bank of Sri Lanka settled in February. The arrangement was not extended.
RBI has a framework in which it can offer credit swap facilities to SAARC countries in an aggregate corpus of $ 2 billion. According to RBI, the ASACR currency swap facility came into effect in November 2012 with the aim of providing small countries in the region with “a line of funding support for short-term foreign exchange liquidity needs or balance of payments crisis until longer term agreements are made “.
The presumption was that only India, as the largest economy in the regional group, could do this. The Bangladesh-Sri Lanka agreement shows that this is no longer valid.