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Bangladesh cleared a $200 million currency swap facility for Sri Lanka, becoming the first South Asian country to extend crucial financial assistance to the island nation this year
Details
- Against the fund, Sri Lankan would keep the same amount of its local currency, Rupee, with the Bangladesh Bank along with a government guarantee.
- The BB would get around 1-2 percent plus LIBOR from Sri Lanka as interest.
- The currency swap agreement also contains a rollover condition, allowing Sri Lanka to extend the period of repayment of the loan.
- The currency swap initiative was taken after Sri Lankan prime minister Mahinda Rajapaksa’s visit to Bangladesh to join the celebrations of the golden jubilee of Bangladesh’s independence.
Reason behind the swap
- With Sri Lanka’s main foreign exchange-earning sectors – tourism, export of garments and tea – badly hit due to the pandemic, the country has been struggling to maintain its reserves in the face of a daunting debt repayment schedule.
- In April 2021, Sri Lanka’s foreign reserves stood at $ 4.5 billion, about the same amount that the country is due to settle this year in external loan repayments.
India and forex exchange
India, which prolonged a $400 million forex swap facility from the Reserve Bank of India – it was settled in February 2021 after an extension.
Currency swap
- It is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies.
- The parties are essentially loaning each other money and will repay the amounts at a specified date and exchange rate.
- The purpose could be to hedge exposure to exchange-rate risk, to speculate on the direction of a currency, or to reduce the cost of borrowing in a foreign currency.
Source: The Hindu
