What has happened?
- India on Thursday confirmed a $400 million currency swap with Sri Lanka while deferring another $500 million due for settlement to the Asian Clearing Union (ACU),
- In a move aimed at helping the island nation witnessing an unprecedented economic crisis.
- In a tweet on Thursday, the Indian mission in Colombo said High Commissioner Gopal Baglay met Central Bank Governor Ajith Nivard Cabraal and expressed
- “India’s strong support to Sri Lanka” in the wake of the Reserve Bank of India extending facilities of $900 million over the last week.
- “Had an excellent discussion with Indian High Commissioner to #SriLanka HE Gopal Baglay at my office this morning where he confirmed the #SAARC #SWAP by RBI and other forms of bilateral cooperation,” Cabraal said in a tweet.
Request from Sri Lanka
- India’s assistance follows a request from Sri Lanka during Finance Minister Basil Rajapaksa’s visit to New Delhi in December, for emergency financial assistance,
- Including Lines of Credit for importing essentials and a currency swap to boost Sri Lanka’s draining foreign reserves.
Crisis in sri lanka
- The island nation has been badly hit by the pandemic.
- Tourist arrivals (Sri Lanka’s third-largest source of foreign exchange) have stalled, remittances have fallen, and the local rupee has fallen against the US dollar, forcing import restrictions.
- Colombo has to service over $7 billion outstanding debt this year.
- Sri Lanka is facing a shortage of essentials due to a shortage of dollars to pay for the imports.
- Power cuts are being imposed at peak hours as the state power entity is unable to obtain fuel to run turbines.
About the deal
- Since 2012, the Reserve Bank of India has offered swap facilities of up to $2 billion in total, both in foreign currency and rupee,
- To SAARC member countries to help them meet any balance of payments or liquidity crises till they can make long-term arrangements.
- Under the agreement Sri Lanka’s central bank can draw US$, Euro or Indian Rupee in multiple tranches up to a maximum of $ 400 million or its equivalent.
- Since the 2008 financial crisis, central banks around the world have entered into such currency swap agreements.
- Pre-determined terms are meant to ensure that no bank loses.
- While the recipient central bank can use the funds to boost its reserves, the lending bank can further lend the borrower bank’s currency to its domestic banks at its own terms.
Deferring $500 mn at ACU
- The Asian Clearing Union (ACU) was established with its head-quarters at Tehran, Iran, on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), for promoting regional co-operation.
- The main objective of the clearing union is to facilitate payments among member countries for eligible transactions on a multilateral basis,
- Thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries.
- India’s confirmation of the swap comes a week after the two countries signed a long-pending agreement on jointly developing the strategically located Trincomalee oil tank farm along the north-eastern coast of the island.
- Diplomatic sources had earlier indicated that any financial support from New Delhi to Colombo would have to follow the signing of the deal.
- While RBI’s assistance seeks to help Sri Lanka meet its immediate challenge,
- The Trincomalee project has long-term implications both, in terms of investment from New Delhi and its strategic interests in the Indian Ocean.
Relief from China?
- The Central Bank of Sri Lanka has expressed confidence about paying off the foreign debt.
- Ruling out an IMF bailout, Governor Cabraal on Wednesday said Colombo is in talks with Beijing for a new loan, in addition to the $500 million loan and $1.5 billion currency swap extended by
- Beijing as pandemic-time support.
- Sri Lanka owes China over $5 billion already, and Colombo has requested Beijing to restructure it to provide some relief.
Q) Currency Swap is a method of?
- Hedging against foreign exchange risk
- Speculating in foreign exchange
- Leverage instrument used by Central Bank
- Mode of payment in International trade