What is Currency Swap ?
Source : Indian Express
GS II : Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora

Why in News ?

Bangladesh’s central bank has approved a $200 billion currency swap facility to Sri Lanka.

Key Facts

• Bangladesh Bank, Bangladesh’s central bank, has in principle approved a $200 million currency swap agreement with Sri Lanka
  • This will help Colombo tide over its foreign exchange crisis.
  • They had an external debt repayment schedule of $4.05 million this month
• Bangladesh and Srilanka agreed upon currency swaping.

What is Currency Swap ?

• One country providing Dollar or specific currency as loan with an agreement that the debt will be repaid with interest in the currency agreed on.
• In Srilanka – Bangladesh context Bangladesh will give to Sri Lanka in dollars that will be repaid with interest in Sri Lankan rupees.
• How it helps Sri Lanka ?
  • Cheaper than borrowing from the market.
  • They are struggling to maintain adequate forex reserves even as repayment of its external debts.

Bangladesh Economy

• This may be the first time that Bangladesh is extending a helping hand to another country.
• Bangladesh’s economy grew by 5.2 per cent in 2020.
  • It 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.
• First time that Sri Lanka is borrowing from a SAARC country other than India.

Implication for India

• Last year year Srilanka seek for a $1 billion credit swap.
  • Reserve Bank of India did extend a $400 million credit swap facility to Sri Lanka.
  • Also separately, a moratorium on debts that the country has to repay to India.
• India-Sri Lanka relations have been tense over Colombo’s decision to cancel a valued container terminal project at Colombo Port.
• The country is already deep in debt to China.

Reserve Bank of India Policy on Currency Swamping

• RBI 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.
• With the aim of providing to smaller countries in the region a funding for short-term foreign exchange liquidity requirements or balance of payment crisis till longer term arrangements are made.

About SAARC

• South Asian Association for Regional Cooperation (SAARC) was established with the signing of the SAARC Charter in Dhaka on 8 December 1985.
• SAARC comprises of eight Member States: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
• The Secretariat of the Association was set up in Kathmandu on 17 January 1987.
• Aims to promote the welfare of the peoples of South Asia, improve their quality of life, to accelerate economic growth, social progress and cultural development.

Daily Current Affairs : Click Here