The historic credit swap
Shamsul Huq Zahid |
May 30, 2021, 9:17 p.m.
Something amazing is happening. Bangladesh has decided to lend Sri Lanka $ 200 million as part of a currency swap. The loan decision made many people raise their eyebrows, at least, for several reasons. The first reason is the bad credit rating of the borrower – Sri Lanka – and the second is the insufficient reserves to accept such loans.
The problem that Bangladesh itself regularly receives foreign aid for its development and sometimes budget support is irrelevant, as some countries with stable and large reserves sometimes engage in such exchanges of funds. currencies.
The loan decision, it seems, was taken under diplomatic review.
Sri Lanka, at present, has a very small reserve of $ 4.4 billion. He has a debt repayment schedule of $ 4.05 billion this year. Thus, the country is now in deep crisis as regards its foreign reserve.
In contrast, Bangladesh has a healthy reserve of around $ 44 billion. The amount is sufficient to cover import payments for more than nine months. Since there has been a marked decline in imports in recent months, the reserve could meet import demand for more months.
Bangladesh, media reports, decided to lend funds to Sri Lanka under the currency swap deal following a request by Sri Lankan Prime Minister Mahinda Rajapaksa to Prime Minister Sheikh Hasina.
None would surely raise a question about Bangladesh’s ability to offer such a loan which is backed by a sovereign guarantee. Its economy is doing better than any country in the region, even during the pandemic. It was the fastest growing economy in 2020 in South Asia. The country’s per capita income has just surpassed that of India.
There is no denying that Sri Lanka’s credit rating, at the moment, is low and that the central bank’s investment directive discourages this type of risky investment.
India has set up a credit swap framework for the ASACR countries under which the Reserve Bank of India (RBI) can enter into a bilateral agreement and provide short-term assistance.
Many may wonder why Sri Lanka has not contacted India, which has a framework to offer such assistance. Why Bangladesh?
Colombo had requested such assistance, but New Delhi preferred to ignore it, according to a report published in The Indian Express. The Sri Lankan president has reportedly approached Indian Prime Minister Narendra Modi to demand a $ 1.0 billion credit swap and a moratorium on debt repayment to India.
Not that India hasn’t helped Sri Lanka. The RBI, in a currency swap, provided Sri Lanka with $ 400 million in July last year. Colombo repaid the amount with interest last February. But the installation was not extended for the second time.
So the reason (s) for India not responding to Sri Lanka’s request for assistance could be something else. It is believed that the Lankans’ refusal to accept a container terminal project at the port of Colombo has spoiled relations between the two countries.
It is no secret that China plays a dominant role over Sri Lanka and that India opposes such domination.
Thus, it seems natural for Sri Lanka to seek financial assistance from China at the time of its financial distress caused by a significant drop in tourism income and exports of ready-made clothing and tea. time.
But there are issues on this front as well. Sri Lanka is said to have a considerable debt, estimated at $ 5.0 billion, to China. In addition, the latter provided a $ 1.5 billion currency swap facility, in addition to a $ 1.0 billion loan made last year in the form of a loan.
China is the second largest economy in the world and it has enormous weight in the world economy. As part of the Belt and Road Initiative (BRI), it has provided billions of dollars in development assistance to Asia and Africa. Bangladesh is also a beneficiary of the BRI.
India is also one of the world’s major economies, but its reach is much smaller than that of China. However, it exerts a particular influence in the South Asian region, whether economic or otherwise. For geopolitical reasons, China and India have become rivals in the field of wooing the countries of South Asia in their respective folds. Bangladesh has tried to maintain a balance. Whether she was able to do so, however, remains a question for consideration.
Among the ASACR countries, India has the largest economic base. The RBI has a credit swap framework under which it could provide funds of up to $ 2.0 billion to smaller ASACR member countries to meet their short-term needs.
No one ever thought that an ASACR country other than India would ever do a similar credit swap. Although Bangladesh’s only intention is to help Sri Lanka in difficult times, the development is considered historic.