After receiving the US$330 million first tranche of the International monetary Fund’s (IMF) Extended Fund facility of around $3 billion, Cash strapped Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade.
This follows the country’s immediate repayment of $ 121 million as the first installment of the Indian credit line soon after unlocking of $3 billion IMF EFF on Monday 20.
“The amount of Indian loan facility is still uncertain; it could be up to the equivalent of a billion US dollars,” former Central Bank Governor and presently an advisor to the government Indrajit Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.
The money will be used to facilitate India Sri Lanka trade, he said adding that this facility could be in US dollars or in Indian rupees.
India has provided about $4 billion in rapid assistance between January and July, including credit lines, a currency swap arrangement and deferred import payments, and sent a warship carrying essential drugs for the island’s 22 million people
India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.
However, the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, economic analysts said.
India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).
In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.
Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt restructuring.
Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.
Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.
Meanwhile the government is negotiating with India to extend a US$1 billion credit line by a few months as the island nation tries to line up funds for the rest of the year after the receiving of IMF EFF of around US$3 billion.
The credit line was due to expire on March 17 with Sri Lanka having used only about two-thirds of it, mainly for medicines and food, said the finance ministry sources and another official familiar with the matter.
A Finance Ministry official said the government wanted to extend the credit line by 6-12 months because there was about US$300 million left unused. No agreement had been reached, he added.