Explained: What Bangladesh-Sri Lanka Currency Exchange 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 schedule of repaying its external debt of 4.05 million dollars this year, is in urgent 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 following a request from Sri Lankan Prime Minister Mahinda Rajapaksa to the 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, it’s cheaper than borrowing in the market, and it’s a lifeline as it struggles to maintain adequate foreign exchange reserves even as its external debt repayment looms. The duration 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 recovered through bootstraps and, by 2020, was 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 slightly exceeds that of India.
This may be the first time Bangladesh has reached out to another country, so it’s a milestone of sorts.
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 a SAARC 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 because of Colombo’s decision to cancel a project for a valuable container terminal at the port of Colombo.
India has postponed the 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 extractors 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 granted a $ 1 billion loan to Sri Lanka last year, extended the second $ 500 million tranche of that loan. Sri Lanka owes China up to $ 5 billion, according to media reports.
What about the credit swap facility that India granted to Sri Lanka last year?
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.
The RBI has a framework in which it can offer credit swap facilities to SAARC countries as part of a global body of $ 2 billion. According to RBI, the SAARC currency swap facility went live in November 2012 with the aim of providing small countries in the region “with a line of funding support for short-term or crisis liquidity needs. balance of payments until longer-term agreements are reached. 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 it is no longer valid.