CURRENCY SWAP

May 28, 2021

Bangladesh’s central bank has approved a $200 million currency swap facility to Sri Lanka, , which will help Colombo tide over its foreign exchange crisis.

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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.
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.

Why didn’t Sri Lanka approach India, the biggest economy in the region?

India-Sri Lanka relations have been tense over Colombo’s decision to cancel a valued container terminal project at Colombo Port.
Last July, the Reserve Bank of India did extend a $400 million credit swap facility to Sri Lanka, which Central Bank of Sri Lanka settled in February. The arrangement was not extended.

Source : Indian Express