Forex crisis in Lanka: Bangladesh extends loan terms

Forex crisis Lanka

| Update:
May 09, 2022 09:01:10

Bangladesh is extending the duration of a bilateral currency swap deal with Sri Lanka by a year due to the currency shortages the cash-strapped island nation is suffering.

Officials said on Sunday that the central bank of Bangladesh has taken the decision to extend the swap period with the Central Bank of Sri Lanka (CBSL).

A meeting of the Bangladesh Bank Board of Directors, held at its offices in Dhaka on the same day with Governor BB Fazle Kabir as chairman, adopted the decision.

“Our board has decided to extend the duration of the agreement for another year to help the island nation minimize the currency crisis on its economy,” a senior central banker told the FE after the meeting.

In fact, the CBSL will benefit from a nine-month extension of the currency agreement for three installments, he explained.

The central bank provided a total of $200 million to help prop up rapidly depleting foreign exchange reserves and ease pressure on its exchange rate.

The decision on the currency swap was triggered during Sri Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh in March 2021.

As per the agreement, CBSL has already deposited an equivalent amount of its currency in the BB account which has already been opened in the SAARC member country.

It is the first currency exchange outside the Asian Clearing Union (ACU) mechanism, which was prompted by the unrest sparked in that country by the crisis.

The ACU is an agreement involving Bangladesh, Bhutan, India, Iran, Myanmar, Nepal, Pakistan, Sri Lanka and the Maldives, whereby intra-regional transactions between participating central banks are settled on a multilateral basis.

Earlier on August 18 last calendar year, the BB transferred $50 million to the CBSL as part of the first installment under the currency swap agreement initiated in March 2021.

Meanwhile, Sri Lanka has already temporarily suspended payment of its external debt to avoid a default as its limited foreign exchange reserves are needed for imports of essential items such as fuels.

“We have come to a point where debt repayment is difficult and impossible. The best action that can be taken is to restructure the debt and avoid a default,” Central Bank Governor P. Nandalal Weerasinghe told reporters on April 12.

JP Morgan analysts estimate Sri Lanka’s gross debt service to stand at $7.0 billion in 2022 and a current account deficit of around $3.0 billion, according to media reports.

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