Bangladesh’s central bank has approved a $200 million currency swap facility to Sri Lanka.

Practice question for mains:

Q. What are Currency Swaps? Discuss the efficacy of Currency Swap Agreements for liberalizing bilateral trade.

What is a Currency Swap?

• In this context, 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, and a lifeline as is it struggles to maintain adequate forex reserves even as repayment of its external debts looms.
• The period of the currency swap will be specified in the agreement.

A helping hand for SL

• Bangladesh Bank, the central bank, has in principle approved a $200 million currency swap agreement with Sri Lanka.
• Dhaka decided to extend the facility after a request by Sri Lankan PM Mahinda Rajapaksa to Bangladesh’s PM Sheikh Hasina.
• It will help Colombo tide over its foreign exchange crisis, according to media reports from Bangladesh, quoting the bank’s spokesman.
• Sri Lanka, staring at an external debt repayment schedule of $4.05 million this year, is in urgent need of foreign exchange.

An unusual move

• Bangladesh has not been viewed so far as a provider of financial assistance to other countries.
• It has been among the most impoverished countries of the world, and still receives billions of dollars in financial aid.
• But over the last two decades, its economy has pulled itself up literally by the bootstraps, and in 2020, was the fastest growing in South Asia.
• Bangladesh’s economy grew by 5.2 percent in 2020 and is expected to grow by 6.8 percent in 2021.
• The country has managed to pull millions out of poverty. Its per capita income just overtook India’s.

A break in monopoly

• This may be the first time that Bangladesh is extending a helping hand to another country, so this is a landmark of sorts.
• It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.
• The presumption was that only India, as the regional group’s largest economy, could do this.
• The Bangladesh-Sri Lanka arrangement shows that is no longer valid.

Why didn’t SL approach India?

• Last year, it requested for a $1 billion credit swap, and separately, a moratorium on debts that the country has to repay to India.
• But India-Sri Lanka relations have been tense over Colombo’s decision to cancel a valued container terminal project at Colombo Port.
• India put off the decision, but Colombo no longer has the luxury of time.

Is SL in a crisis?

• With 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. According to media reports, Sri Lanka owes China up to $5 billion.

What about the previous swap facility that India gave Sri Lanka?

• Last July, the RBI did extend 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 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.

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