In a first for Bangladesh, the country has extended a lifeline of sorts to the beleaguered Sri Lankan economy, offering to top up the island nation’s depleting foreign reserves by as much as $500 million, Dhaka-based Daily Star reported.
The annoucment came ahead of the maturity of $1 billion International Soverign Bond scheduled in July. Further, the Central Bank of Sri Lanka has over $800 million worth of maturing SWAP arrangments, inclduing $342 million before end-June.
While Sri Lanka’s foreign exchange reveres stood at $4.5billion at-end Paril, Bangladesh’s FX reserves hit the $45 billion mark for the first time in the country’s history in the same month.
The two countries are hoping to enter into a currency swap arrangement, initiated during Sri Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh in March for the Golden Jubilee celebrations.
According to the Newspaper, the arrangement would allow Sri Lanka’s Central Bank to exchange Sri Lankan rupees for $200 million from the Bangladesh Bank, with a extension upto $500 million.
The Central Bank of Bangladesh has granted approval for a $200 million SWAP facility with Sri Lanka initially, according to its spokesperson Md. Serajul Islam.
The Central Bank of Sri Lanka is expected to return the amount in three months at the interest rate of LIBOR + 2 percent. If the tenure goes up to six months, the interest rate would be LIBOR + 2.5 percent.
Sri Lanka’s Central Goverment debt surpassed the GDP last year, despite a decline in foreign debt, as the Central Bank printed billions of Rupees worth of new money.
With only nine of the 16 IMF programs in Sri Lanka were completed, some experts in Bangladesh have already voiced concerns.
The government, so far, resisted any potential new programs with IMF. However, many analysts still expect the government to negotiate a new IMF program by mid-this year or the latter half of the year.
Instead of seeking IMF assistance, the government relied on import restrictions, exports, and bi-lateral assistance to overcome the current debt crisis.
However, the trade deficit widened to $2.06 billion in the first quarter of the year from $1.85 billion in the first quarter of last year.
The goverment is also eyeingto avert a possiility of seeking IMF assitnace by expediting mega projects such as Colombo Port City. The Parliment last week approved the required legislaive framework for the project which would grant massive tax breaks for foreign investors.
However, import restrictions have also contributed to a spike in inflation in Sri Lanka while the country’s labor force in the private sector underwent through pay cuts amidst the COVID-19 crisis last year.
So far, China and South Korea extended over $2 billion in loans and currency SWAP arragemnts to Sri Lanka this year. However, concerns reemains over conditions of Chinese loans, whch are linked to trade with China.
Usually, currency swap arrangements take place between the central banks of a wealthier nation and a not too well-off one, said Ahsan H Mansur, executive director of the Policy Research Institute, a private think-tank. Sri Lanka’s Per Capita GDP is almost double of Bangladesh.
“There is an exchange rate risk involved, but that is on Sri Lanka. There is a country risk too — what if Sri Lanka becomes insolvent?” he added.
However, the two nations has built-up close ties over the year, especially business-to-business are currently at an all-time high.
Sri Lanka’s private sector including Hemas, Hidramani, Commercial Bank, NDB Bank, and LTL holdings ahas setup opreations with market presense in Bangaldesh over the years.
In addition, earlier, the two countries were also negotiating free trade pact, which was likley to be the first bi-lateral Free Trade Agreement of the Bangaldesh. However, the current goverment after coming into power has put also trade negotiations under review. At the same time, Bangaldesh is advancing with several trade pacts with number of countries, further opening the country’s economy to competition.