Central Bank hopeful of resurrecting Indian swap-line as buffers run thin

The Central Bank last week indicated its intention to re-enter into a swap line for US$ 400 million to shore up country’s foreign reserves, which are increasingly running thin amid the impending crisis brewing in the country. 
Sri Lanka in February this year settled the US$ 400 million swap line entered into with the Indian Reserves Bank in July last year as part of the financial assistance package available to countries in the SAARC bloc to help them assist to recover from the pandemic’s toll on their external sector and the broader economy.

At the time of the settlement, the Central Bank said they were engaging with Indian authorities for further assistance in the future. 

According to Central Bank Governor Professor W.D. Lakshman, who addressed the media on Friday ahead of government’s about turn on the decision to lift travel restrictions and re-open the economy, the country could draw down US$ 400 million via a swap line in August. 

According to him the recipient could make number of drawings from the swap line once it is made available. After being rolled over in July 2020, there are still a couple of more drawings available under the facility, which typically come after a cooling off period embedded into the facility from the date of settlement. 

Meanwhile, a US$ 200 million swap line from Bangladesh’s Central Bank is also proceeding with speed and it could be available as early as in a month.

Sri Lanka in March entered into US$ 1.5 billion equivalent swap line with People’s Bank of China, but this wasn’t collected as part of the reserves as authorities kept the facility as a stand-by arrangement to confront exigencies. 
Sri Lanka’s foreign exchange reserves fell by nearly half a billion dollars in May to little above US$ 4.0 billion, just not enough to cover three months of imports and a billion dollar worth of sovereign bond is due for settlement on July 27. 

Sri Lanka has a tall order in foreign currency obligations lined up due in the next few months as it has US$ 1.48 billion liabilities for settlement in June and another US$ 1.9 billion from July through September including the billion dollar sovereign bond repayment. But a large swath of the economy remains closed for over a month now exacerbating the situation as it undermines the output significantly, including the output aimed at Sri Lanka’s export clientele.