Sri Lanka gets second currency swap from India; total US$1.1bn

ECONOMYNEXT -Sri Lanka has received a 400 million US dollar currency swap from Reserve Bank of India’s facility for South Asia, Central Bank Deputy Governor Nandalal Weerasinghe said, taking the total support to the island’s monetary authority to 1.1 billion dollars.

Proceeds of the 400 million dollar three-month swap had arrived in Sri Lanka on March 08, and is in the country’s official reserves, he said.

The swap could be extended.

In 2015 Sri Lanka borrowed 400 million dollars from RBI’s facility for countries in the South Asian Association for Regional Co-operation (SAARC) but repaid it six months later. Each country could borrow from 100 to 400 million dollars from the program.

On March 08, a 1.1 billion US dollar swap from RBI, expired after being extended for five days from March 08.

India’s cabinet of ministers this week gave the nod to provide another 700 million dollar swap to Sri Lanka’s central bank taking the total up to 1.1 billion dollars. The facility will be available for three months or until a deal is reached with the International Monetary Fund, India said.

Sri Lanka’s foreign reserves came under pressure as excess liquidity was used up to extend credit, debt was monetized to finance a sudden surge in election related spending from January 2015.

Foreign investors also pulled out of rupee bond markets as the currency came under pressure and the credibility of the island’s peg weakened.

The IMF deal is expected to correct the economic imbalances by raising more taxes and tightening policy. Prime Minister Ranil Wickremesinghe has already announced a hike in taxes, which will have to be legislated.

Fitch Ratings downgraded Sri Lanka’s ‘BB-’ rating to ‘B+’ and the outlook to negative.  Standard and Poor’s downgraded the outlook on its ‘B+’ rating to negative last week.

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