India finalises $400 mn currency swap for Sri Lanka, to consider President Rajapaksa’s request for further aid

India on Saturday announced it had finalised a $400-million currency swap facility for Sri Lanka under the Saarc framework, and people familiar with developments said Colombo’s request for a bilateral swap facility for $1.1 billion is being considered.

The Reserve Bank of India (RBI) signed documents for giving effect to the currency swap facility for the Central Bank of Sri Lanka on Friday. The arrangement will remain available till November 2022, and the Indian mission in Colombo informed senior officials of the Central Bank Sri Lanka government about the decision.

This currency swap was extended by India following a request from the Sri Lankan side for the facility under the South Asian Association for Regional Cooperation (Saarc) Currency Swap Framework in order to cope with the impact of the Covid-19 pandemic.

During a phone conversation with Prime Minister Narendra Modi on May 23, Sri Lankan President President Gotabaya Rajapaksa had asked the Indian government to provide a special swap facility of $1.1 billion “to top up the $400 million under the Saarc facility”.

One of the people cited above said on condition of anonymity: “While the agreement for the currency swap under the Saarc framework has been concluded, the bilateral swap request for $1.1 billion is being considered.”

A statement issued by the Sri Lankan president’s office in May had quoted Rajapaksa as saying the special swap of $1.1 billion “would enormously help Sri Lanka in dealing with our foreign exchange issues”.

A currency swap facility helps a country obtain foreign currency loans at better interest rates than by borrowing directly from the market, and repayment is done at the exchange rate fixed at the time of borrowing. This eliminates risks due to fluctuations in exchange rates.

Sri Lanka has made several requests for assistance from India after the Covid-19 pandemic devastated the country’s tourism industry. The Indian move to aid the island nation comes at a time when New Delhi is shoring up relations with countries in the neighbourhood against the backdrop of the border standoff with China.

On July 14, India’s deputy high commissioner Vinod K Jacob met and discussed the currency swap arrangement with the Governor of Sri Lanka’s Central Bank, WD Lakshman. On July 22, the Indian high commission also facilitated technical discussions on rescheduling of bilateral debt repayment by Sri Lanka.

During his visit to India earlier this year, Rajapaksa had sought a moratorium on repayment of loans worth almost $1 billion.

“These positive developments illustrate active implementation of the leadership-level commitment to work together for addressing the challenges arising from the Covid-19 pandemic, and further the mutually beneficial India-Sri Lanka partnership, including in the economic domain,” said a statement issued by the Indian high commission in Colombo.

The people cited above said the prime minister had already conveyed India’s support to Sri Lanka in dealing with the pandemic and its economic impact.

“The request from Sri Lanka came against the backdrop of the country’s economy, like that of many other countries, slowing down. Increasing foreign exchange outflows in Sri Lanka resulted in the dwindling of its dollar reserves and added pressure on the Sri Lankan rupee,” said the person cited above.

The currency swap agreement with Sri Lanka reflects India’s commitment to help its “friendly neighbour with its economic revival amid the pandemic”, the person said.

Earlier, India had assisted Sri Lanka by sending four consignments of essential medicines and equipment during April-May to fight the pandemic.

RBI’s currency swap arrangement for Saarc states has a corpus of $2 billion. This facility became operational in November 2012 to provide funding for short-term foreign exchange liquidity requirements.