Bangladesh -Sri Lanka currency swap

Bangladesh Bank, Bangladesh’s central bank, has in principle approved a $200 million currency swap agreement with Sri Lanka, which will help Colombo tide over its foreign exchange crisis.

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Sri Lanka, staring at an external debt repayment schedule of $4.05 million this year, is in urgent need of foreign exchange. Its own foreign exchange reserves in March year stood at $4 million.

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.

Bangladesh’s economy grew by 5.2 per cent in 2020, and is expected to grow by 6.8 per cent in 2021. The country has managed to pull millions out of poverty. Its per capita income just overtook India’s.

Bangladesh’s forex reserves in May were a healthy $45 billion. In 2020, despite fears that the pandemic would hit remittances, Bangladeshis living abroad sent over $21 billion. It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.