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Recently, Bangladesh’s central bank has approved a $200 million currency swap facility to Sri Lanka.
Major Highlights
- 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.
- For Sri Lanka, this is cheaper than borrowing from the market. The period of the currency swap will be specified in the agreement.
- Both sides have to formalise an agreement to operationalise the facility approved by Bangladesh Bank. It will help Colombo tide over its foreign exchange crisis.
- Bangladesh has become the first South Asian country to extend crucial financial assistance to Sri Lanka this year.
- It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.
Why does Sri Lanka need this?
- Sri Lanka struggles to maintain adequate forex reserves even as repayment of its external debts looms.
- 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 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 tranches of that loan.
- Sri Lanka also inked a $500 million loan agreement with the EXIM Bank of Korea.
What is a Currency Swap?
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India’s response to Sri Lanka demand
- India extended a $400 million currency swap facility from the Reserve Bank of India to Srilanka – it was settled in February 2021 after an extension.
- It is yet to respond to Sri Lanka’s year-old request for an additional $1.1 billion currency swap facility.
- The Currency Swap Agreement and its extension in the case of Sri Lanka is a reconfirmation of India’s Adherence to the Gujral Doctrine while dealing with neighbours as well as a rule-based currency regime.
- The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.
About SAARC Currency Swap Facility
Gujral Doctrine
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