SL-China currency swap : A cure for dollar dependency or jump into fire ?   

The Central Bank of Sri Lanka (CBSL) and the People’s Bank of China (PBC) entered into a bilateral currency swap agreement with a view to promoting bilateral trade and direct investment for economic development of the two countries, and to be used for other purposes agreed upon by both parties.

The People’s Republic of China remains Sri Lanka’s largest source of imports. In 2020, imports from China amounted to USD 3.6 billion 22.3% of Sri Lanka’s imports.

This Swap agreement has been approved by the Cabinet of Ministers with the recommendation of the Monetary Board of CBSL. Governors of the two Central Banks, Prof. WD Lakshman and Dr. Yi Gang, from the CBSL and PBC respectively were the signatories to the agreement.

Under this agreement, CBSL is entitled for a swap facility amounting to CNY 10 billion (approximately USD1.5 billion which is equivalent to around LKR 225 billion.

The agreement is valid for a period of three (3) years. Economic experts say if implemented completely, agreement could keep in check rupee’s volatility against the USD.

Experts noted that once the currency swap agreement between China and Sri Lanka comes into full force, it will significantly lift pressure off the foreign exchange reserves and the dependency on the dollar will decrease.

They added that according to the pact, the limit for exchange of local currencies of the two cannot be used for the repayment of debt or import of goods from other countries.

This means at the end of the three years of the agreement, if PBC has accumulated LKR 225 billion, the PBC can ask for 10 billion yuan in exchange for LKR 225 billion.

The Sri Lanka Central Bank is obligated to pay it under the agreement. If the Sri Lanka Central Bank has only 2 billion yuan, Sri Lanka can’t pay the amount in yuan, veteran economic analyst said.  

Instead Sri Lanka has to pay the balance amount in a currency acceptable to PBC and that currency could possibly be U.S. dollars and this will put pressure on the country's foreign reserves.

Sri Lanka has faced a similar situation when it has re-payed USD 400 million currency swap to India before its due date on Indian  request from the island nations current reserves.

If this happens again Sri Lanka will be pushed into fire from the frying pan, he commented.Meanwhile Sri Lanka and Bangladesh central banks will conduct talks over a swap arrangement, a joint communiqué said after a visit by Prime Minister Mahinda Rajapaksa to the South Asian neighbour.