Bangladesh has agreed to lend debt-ridden Sri Lanka loans of at least $200 million from the foreign exchange reserves under a currency swap deal. This $200 million currency swap is part of a larger scheme of foreign exchange swaps amounting to $500 million. In this context, a currency swap is effectively a loan Bangladesh is providing to Sri Lanka in dollars, under an agreement that the debt will be repaid with interest in Sri Lankan rupees. The currency swap initiative was taken after Sri Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh to attend the joint celebrations of the golden jubilee of Bangladesh’s independence and the birth centenary of Bangabandhu. This is the first time in its history, Bangladesh is going to make such an investment in a foreign country through a currency swap deal. It is also the first time that Sri Lanka is borrowing from a SAARC country other than India.
For Bangladesh, the Central Bank would get around 1-2 percent plus LIBOR (London Interbank Offer Rate) from Sri Lanka as interest. And for Sri Lanka, this is cheaper than borrowing from the market, and a lifeline as it is struggling to maintain adequate forex reserves even as repayment of its external debt. Besides the currency swap agreement also contains a rollover condition, allowing Sri Lanka to extend the period of repayment of the loan. The deal will be for one year during which the fund will be provided. After getting the entire amount, Sri Lanka will have to repay it within three months.
Although Sri Lanka’s GDP per capita of $3,852 which is higher than that of Bangladesh, but the country’s economy has been in deep trouble ever since the 2019 Easter bombings and subsequently the outbreak of the coronavirus pandemic that has wreaked havoc for its tourism industry and other sectors. The coronavirus pandemic has been particularly hard for the island nation’s tourism-dependent economy, with its $3.7 billion of foreign debt maturing this year. The nation was deprived of precious foreign currency during the period which mostly comes from tourism and trade. Due to the Covid-19, the country’s economy shrank 3.6% last year which made it the worst downturn since independence from Britain in 1948. Sri Lanka, staring at an external debt repayment schedule of $4.05 million this year, is in urgent need of foreign exchange. Its own foreign exchange reserves in March year stood at $4 million. The currency swap deals with Bangladesh came through as the island battles against debt crisis and a dollar shortage in maintaining a moderate foreign exchange reserve. This deal is signed at a time when Sri Lanka is at risk of defaulting according to global rating agencies such as global rating agency S&P cut the nation’s long-term foreign currency credit rating from B- to CCC+ for 2020.
Bangladesh has not been perceived so far as a provider of financial assistance to other countries. But over the past two decades, the country has successfully emerged from the status of an impoverished country into the economic powerhouse as it is today, but for that; Dhaka had to come a long way. The country maintained strong exports consistently, especially in its garments industry, surpassing both India and Pakistan. The country is touted as a South Asian development model similar to South Korea, China, and Vietnam, which also had export-led economic models proving successful in overall prosperity. As a result, its economy has pulled itself up literally by the bootstraps, and in 2020, was the fastest growing in South Asia. Bangladesh’s economy grew by 5.2 per cent in 2020, and is expected to grow by 6.8 per cent in 2021. Bangladesh’s economic rise, and its subsequent deepening of ties, should not come as a surprise since it has continuously reaped benefits from the European Union’s Generalized Scheme of Preferences (GSP) programme and other trade preferences. It is due to this continuous support through the EU’s GSP scheme that Dhaka has been able to earn considerable revenues from strategic exports. Bangladesh is now trading with major ASEAN countries while looking at trade pacts and connectivity projects with some ASEAN countries. The country has managed to pull millions out of poverty. Its per capita income just overtook India’s. In 2020, despite fears that the pandemic would hit remittances, Bangladeshis living abroad sent over $21 billion. Bangladesh’s foreign reserves have reached $45 billion in 2021 from around $9 billion in 2010, while inward remittances reached $200 billion. The International Monetary Fund considers foreign exchange reserve adequate when the balance is enough for meeting import expenditures for three to eight months. The current reserve of Bangladesh is enough for meeting import expenditures for nearly eight months.
Bangladesh is also among the 40 countries that have sent Covid relief aid to India twice as the country battles the second wave. Bangladesh has been found to stand with other countries throughout its history with humanitarian assistance prior to these assistances to India and Sri Lanka. Bangladesh believes in behaving responsibly with its neighbors and reaching out to those who need their help. The country is now looking at deeper integration with its neighbors while not undermining others. From providing India with Covid relief materials to extending financial help to Sri Lanka in its hour of crisis, Bangladesh has started to showcase its economic rise and use it to forge deeper ties with neighbors. Referring Bangladesh’s emerging as a donor state, Prabir De, professor at the Research and Information System for Developing Countries (RIS), stated recently that “Bangladesh is the new Royal Bengal Tiger of Asia”.
This article was originally published in https://moderndiplomacy.eu
