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Current Affairs

Bangladesh and Sri Lanka currency swap deal

Date: 29 May 2021 Tags: Miscellaneous

Issue

The central bank of Bangladesh has approved a currency swap agreement worth $ 200 million with Sri Lanka.

 

Background

Sri Lanka is facing a foreign currency crisis due to loss in exports and other foreign currency medium. The government is forced to ask for help to fulfil their external obligations.

 

Details

  • The move by the Bangladesh central bank will help Sri Lanka tide over its foreign exchange crisis that it is currently facing.

  • The Sri Lanka has a current obligation of $ 4.05 billion in external loans. Its current foreign reserves stood at $ 4 billion.

 

Currency swap

  • Currency swap is a type of loan that is given by a country in dollars and the beneficiary country will return the loan and interest in its domestic currency.

  • Bangladesh central bank will be extending dollar loans while Sri Lanka will have to return both the principle and interest in Sri Lankan rupees.

  • The period of currency swap will be mentioned in the agreement. It is more economical than borrowing from open market.

 

Significance

  • Bangladesh is traditionally not known as economic powerhouse, which can lend to other countries. It still receives billions in aid.

  • However, from the last couple of decades it has been successful in pulling millions out of poverty. The GDP growth is consistently increasing.

  • Recently, Bangladesh has overtaken India as the fastest growing economy in South Asia. Its per capita GDP is higher than India.

  • Bangladesh’s Forex reserves are comfortable at $ 45 billion. It is also the first time than Sri Lanka has borrowed from a SAARC nation other than India.

 

Problems in Sri Lanka

  • Sri Lanka has already requested India for a $1 billion line of credit along with moratorium for the already existing loans.

  • The biggest foreign currency earner in form of tourism has already been crippled after the Easter Sunday attacks.

  • The Tea and textile industries are at loss due to the pandemic and the time of return for international loans has arrived, making Sri Lanka tremble.

  • Sri Lanka has outstanding loans for a sum of $ 5 billion with China. The situation mandates serious measures for the government.

 

India’s previous help to Sri Lanka

The RBI had extended a $ 400 million currency swap agreement with Sri Lanka last year that was settled in February and not extended.