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Currency Swap Between Bangladesh And Sri Lanka

Posted on May 28, 2021 by admin1  294

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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?                       

  • The Currency Swap Agreement means the contract for the exchange of Currencies at predetermined Terms and Conditions.
  • It is like an open-ended Credit Line from one country to another
  • The Interest rates are charged as per standard benchmarks like LIBOR, etc
  • Benefits:
  • It helps to meet short term foreign exchange liquidity requirements.
  • It also ensures adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.

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

  • 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
  • Swap drawls can be made in US Dollar, Euro or Indian Rupee.
  • If swap currency is in Indian Rupees, certain concessions may be extended.
  • Any SAARC member can avail of this facility subject to their signing of bilateral Swap agreements Valid from 2019 to 2022.

Gujral Doctrine

  • It  is a set of five principles to guide the conduct of foreign relations with India’s immediate neighbours.
    • These five principles arise from the belief that India’s stature and strength cannot be isolated from the quality of its relations with its neighbours.
  • These principles are:
    • India does not ask for reciprocity but gives and accommodates what it can in good faith and trust with neighbours like Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka.
    • No South Asian country should allow its territory to be used against the interest of another country of the region.
    • No country should interfere in the internal affairs of another.
    • All South Asian countries must respect each other’s territorial integrity and sovereignty.
    • They should settle all their disputes through peaceful bilateral negotiations.

Source :IE

 
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