Sri Lanka seeks $1.1B currency swap facility from India as pandemic batters forex kitty

Amid the financial crunch due to the Coronavirus pandemic and subsequent disruption to global commerce, Sri Lanka has sought a special USD 1.1 billion currency swap facility from India to boost the country's draining foreign exchange reserves. President Gotabaya Rajapaksa's office said the new request is in addition to the USD 400 million amount Sri Lanka has sought from the Indian government under the South Asian Association for Regional Cooperation (SAARC) framework.

Rajapaksa made the request over a phone call with Prime Minister Narendra Modi on Saturday, which the President's office described as “very constructive and cordial."

“If the Government of India could provide $ 1.1 billion special SWAP facility to top up $ 400 million under SAARC Facility, it would enormously help Sri Lanka in dealing with our foreign exchange issues," the statement from Rajapaksa’s office quoting the president said.

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What is a currency swap?

A currency swap is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency. At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate. This is used by countries to defend against financial turmoil by allowing the country beset by a liquidity crisis to borrow money from others with its own currency.

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Economy in turmoil

The COVID-19 pandemic has hit the Sri Lankan economy hard as revenues from tourism — a major foreign currency earner — has dried up completely as countries across the globe imposed strict travel restrictions. The country is also facing crunch due to a slump in exports of cash crops and has the arduous task of servicing its massive debt owed to China, which has over the years employed predatory tactics to trap smaller countries in loans and then seize solid assets.

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COVID cases in SL

The COVID-19 disease has claimed nine lives and infected 1,068 people in Sri Lanka so far, one of the lowest rates in South Asia and just a tiny fraction of India. India has already sent four consignments of essential life-saving medicines and medical supplies weighing over 25 tonnes to Sri Lanka in the last few weeks as a goodwill gesture. 

(AP Photo)

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