What Bangla-Lanka currency swap means ?

Bangladesh's central bank has granted a $200 million currency swap facility with Sri Lanka, according to the Indian Express. What does this signify, and why does it matter?

What exactly is the plan?

According to Bangladeshi media sources citing the bank's spokesperson, the Bangladesh Bank has authorized in principle a $200 million currency swap arrangement with Sri Lanka, which will aid Colombo in overcoming its foreign exchange problem.

Sri Lanka is in desperate need of foreign money, with an external debt repayment schedule of $4.05 million due this year. Its own foreign exchange holdings were $4 million in March of this year.

To put the facility sanctioned by Bangladesh Bank into action, the two parties must sign a written agreement. Following a proposal from Sri Lankan Prime Minister Mahinda Rajapaksa to Bangladeshi Prime Minister Sheikh Hasina, Dhaka consented to extend the service.

What is the definition of a currency swap?

A currency swap, in this context, is basically a loan from Bangladesh to Sri Lanka in dollars, with the promise that the debt will be returned in Sri Lankan rupees with interest. This is a lifeline for Sri Lanka, which is struggling to retain enough currency reserves as payback of its foreign obligations approaches. The agreement will specify the duration of the currency swap.

Isn't this something odd for Bangladesh to do?

Bangladesh has not been perceived as a source of financial aid to other nations in the past. It has long been one of the world's poorest countries, and it continues to receive billions of dollars in aid. However, during the last two decades, it has literally dragged itself up by the bootstraps, and by 2020, it will be the fastest-growing economy in South Asia.

Bangladesh's economy expanded by 5.2% in 2020 and is expected to expand by 6.8% in 2021. Millions of people have been lifted out of poverty in the country. Its per capita income just overtook India’s.

This may be the first time Bangladesh has offered assistance to another country, thus it is a watershed moment.

Bangladesh's foreign exchange reserves were $45 billion in May. Despite predictions that the epidemic would have a negative impact on remittances, Bangladeshis residing abroad remitted over $21 billion in 2020. Sri Lanka is also borrowing from a SAARC country other than India for the first time.

Why didn't Sri Lanka contact India, the region's largest economy?

It did, but it received no response from Delhi. President Gotabaya Rajapaksa approached Prime Minister Narendra Modi last year seeking a $1 billion credit swap and, separately, a moratorium on debt repayments to India. However, tensions have arisen between India and Sri Lanka as a result of Colombo's decision to cancel a vital container terminal project at Colombo Port.

India delayed making a choice, but Colombo no longer has that luxury. Sri Lanka has already lost one of its main foreign exchange pullers before the epidemic, with the tourist industry decimated since the 2019 Easter bombings. The epidemic, which is harming exports, has also hurt the tea and clothing sectors. In 2020, remittances grew, but they will not be enough to help Sri Lanka out of its dilemma.

China already owes the country a large amount of money. Sri Lanka received a $1.5 billion currency swap facility from Beijing in April. Separately, China, which provided Sri Lanka with a $1 billion credit last year, has extended the second $500 million tranche of that credit. Sri Lanka, according to media sources, owes China up to $5 billion.

What about India's credit swap facility with Sri Lanka last year?

The Reserve Bank of India did extend a $400 million credit swap facility to Sri Lanka in July, which was settled in February by the Central Bank of Sri Lanka. The contract was not renewed.

The RBI has a structure in place that allows it to grant credit swap facilities to SAARC nations up to a total of $2 billion. The SAARC currency swap facility was launched in November 2012 with the goal of providing “a backup line of finance for short-term foreign exchange liquidity shortages or balance of payment crises until longer-term arrangements are made,” according to RBI.

Only India, as the region's largest economy, was thought to be capable of doing so. The Bangladesh-Sri Lanka agreement demonstrates that this is no longer the case. 

(Source: Indian Express)