Bangladesh-Sri Lanka Currency Swap Agreement – UPSC GS2

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 it struggles to maintain adequate forex reserves even as repayment of its external debts looms.

Bangladesh has not been viewed so far as a provider of financial assistance to other countries.

It has been among the most impoverished countries of the world, and still receives billions of dollars in financial aid.

But over the last two decades, it has managed to elevate its economy itself majorly, and in 2020, was the fastest growing in South Asia.

The country has managed to pull millions out of poverty.

Its per capita income just overtook India’s.

This may be the first time that Bangladesh is extending a helping hand to another country, so this is a landmark of sorts.

In 2020, the President of Sri Lanka requested India for a USD 1 billion credit swap, and separately, a moratorium on debts that the country has to repay to India.

But India-Sri Lanka relations have been tense over Colombo’s decision to cancel a valued container terminal project at Colombo Port, which made India put off the decision.

Earlier, in July 2020, the Reserve Bank of India (RBI) extended a USD 400 million credit swap facility to Sri Lanka, which the Central Bank of Sri Lanka settled in February. The arrangement was not extended.