Bangladesh approves currency swap facility to Sri Lanka

Bangladesh approves currency swap facility to Sri Lanka

Part of: GS Prelims and GS-II – International Relations & GS-III – Economy 

In news

• Bangladesh’s central bank has approved a $200 million currency swap facility to Sri Lanka. 
• It will help Sri Lanka in its foreign exchange crisis.

Key takeaways 

• 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.
• 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. 
• It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.

Sri Lanka didn’t approach India because 

• India-Sri Lanka relations have been tense over Sri Lanka’s decision to cancel a valued container terminal project at Colombo Port.

• Last July, RBI had extended a $400 million credit swap facility to Sri Lanka, which was settled in February. 

• The arrangement was not extended. 
• RBI has a framework under which it can offer credit swap facilities to SAARC countries within an overall corpus of $2 billion. 
• The SAARC currency swap facility came into operation in November 2012.

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