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India considers currency swap of another $1.1 bn with Sri Lanka, no timeline decided

RBI has already finalised an agreement to extend a $400 million currency swap facility to Sri Lanka, but its President Gotabaya has asked for $1.1 billion more.

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New Delhi: India is considering a currency swap agreement of $1.1 billion with Sri Lanka, as the island nation stares at debt management with India as well as China, ThePrint has learnt.

However, no timeline has been decided yet by the Narendra Modi government.

The Reserve Bank of India (RBI) Friday finalised an agreement to extend a $400 million currency swap facility to the Central Bank of Sri Lanka, which will remain available till November 2022, according to the Ministry of External Affairs.

During a phone call with PM Modi on 23 May, Sri Lankan President Gotabaya Rajapaksa had sought India’s assistance for a $400 million currency swap under SAARC arrangements, and an additional $1.1 billion currency swap, bilaterally.

A currency swap is a transaction in which two parties exchange an equivalent amount of money with each other, but in different currencies. It helps in reducing the cost of borrowing in a foreign currency at favourable rates.

Also read: Covid has brought back Chinese whispers in Sri Lanka, Nepal. Is India listening?

Why Sri Lanka wants currency swap

While the $400 million currency swap was done under the SAARC framework, the bilateral swap request for $1.1 billion “will take time”, a top official told ThePrint on the condition of anonymity.

“The increasing foreign exchange outflows in Sri Lanka have been resulting in the loss of dollar reserves, and adding pressure on the Sri Lankan rupee,” said another official.

During President Gotabaya Rajapaksa’s visit to India last year, he had made the initial request for the $1.1 billion bilateral currency swap. At that time, he had also sought a moratorium on the loan Sri Lanka owes to India, which stands at around $1 billion.

According to sources, the Modi government is miffed with the fact that President Gotabaya has created a hurdle in India’s plans to build a container terminal at Colombo Port in collaboration with Japan, seeking to review it under domestic political pressure.

However, India does not want to look like it’s not helping its neighbour as China increases its influence in the region, the sources said.

President Gotabaya had requested a similar moratorium on the loans Sri Lanka had taken from China, but it seems so far that Beijing has given it a cold shoulder, a source said.

Rajiv Bhatia, distinguished fellow at the Gateway House think-tank, added: “We cannot afford but to be generous with our neighbours. But then there has to be mutuality and reciprocity to the relationship. That leverage has to be created at the highest political level.”

Bhatia added: “It is also true that we have our own difficulties. India’s capability is rather limited. New Delhi has made a good gesture by doing this (currency swap); we can help them within our limitations.”

Also read: Why Sri Lanka’s economy faces a painful ‘reset’ in the coming months


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