Following the recent USD 400 million currency swap facility provided by India, Sri Lanka’s foreign reserves which stood at USD 6.8 billion during last March has increased to USD 7.4 billion by last April, indicates latest data from the Central Bank of Sri Lanka (CBSL).

The CBSL has said that hence, Sri Lanka’s foreign reserves are adequate for 4.3 months of imports.

What is a Currency Swap?

In this context, going by the English word ‘swap’, it is exchanging of currencies.

While India provided Sri Lanka with USD 400 million recently, Sri Lanka provided a similar USD 400 million in Sri Lankan Rupees  in lieu of this.

This is an Indian cooperation for a short-term growth of Sri Lanka’s dollar reserves. Sri Lanka has increased its foreign reserves while utilizing the US dollars obtained from India.

While Sri Lanka could utilize these US dollars obtained from India for imports from any country or fulfill its dollar requirements, there are no limitations that this should only be used for transactions with India.

With the end of this Currency Swap agreement, India would return the Rupees to Sri Lanka and in turn Sri Lanka would return the US dollars to India.

Within this period of agreement Sri Lanka has to pay the interest on the US dollars while India would pay the interest on the Sri Lankan Rupees.

There are instances when the CBSL enters into such Currency Swap agreements with local banks whenever Sri Lanka’s foreign reserves fall.

During a USD borrowing by a local bank, the CBSL offers Sri Lankan Rupees in lieu of the USD amount and takes steps to obtain US dollars to the particular value and strengthen its foreign reserves.

When the borrowing bank wants to repay the loan, the CBSL returns the dollars to the local bank and takes the SL Rupees obtained earlier.

The CBSL entering into such currency swap agreements whenever its foreign reserves fall is a normal practice.

The lowest foreign reserves

Sri Lanka’s lowest foreign reserves recorded since February 2012 was during last March.

During March 2015, Sri Lanka’s foreign reserves fell to USD 6.8 billion whereas the lowest recorded figure recorded earlier was USD 6.7 billion during February 2012.

Future of Foreign Reserves

The CBSL has stated that when the next phase of this proposed USD 1.1 billion currency swap agreement with India is implemented Sri Lanka’s foreign reserves would be strengthened further.

Meanwhile, it has also been revealed that Sri Lanka’s balance of payment has fallen to a minus figure since September 2014 due to the huge growth in the government’s local borrowings.

Though during the first two months of 2014 Sri Lanka’s balance of payment remained at USD 809.9 million, it has been recorded at USD 692.1 million during the first two months of 2015.