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As India watches, Sri Lanka seeks FDI and Currency Swap


  • Sri Lanka invited international investment into the Colombo Port City that it described as a “fully Sri Lankan project”, while official sources in New Delhi said they were “keeping a close eye” on the project and its “security implications”.
  • Recently, Bangladesh cleared a USD 200 million currency swap facility for Sri Lanka, to help boost its economy.


GS-II: International Relations (India’s Neighbors, Foreign Policies and Developments affecting India’s Interests)

Dimensions of the Article:

  1. About the Currency Swap deal with Bangladesh
  2. Sri Lanka’s Approach to India
  3. Sri Lanka’s FDI invite

About the Currency Swap deal with Bangladesh

  • Although currency swap between the two countries is an agreement or contract to exchange currencies with predetermined terms and conditions – it is different in the context of Bangladesh and Sri Lanka’s latest deal. The present deal between the two countries is effectively a loan that Bangladesh will give to Sri Lanka in dollars, with an agreement that the debt will be repaid with interest in Sri Lankan rupees.
  • Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made. For Sri Lanka, this is cheaper than borrowing from the market, and a lifeline as it struggles to maintain adequate forex reserves even as repayment of its external debts looms.
  • These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
  • This may be the first time that Bangladesh is extending a helping hand to another country, so this is a landmark of sorts.
  • Bangladesh has not been viewed so far as a provider of financial assistance to other countries. It has been among the most impoverished countries of the world, and still receives billions of dollars in financial aid.
  • But over the last two decades, it has managed to elevate its economy itself majorly, and in 2020, was the fastest growing in South Asia. The country has managed to pull millions out of poverty. Its per capita income just overtook India’s.

Sri Lanka’s Approach to India

  • In 2020, the President of Sri Lanka requested India for a USD 1 billion credit swap, and separately, a moratorium on debts that the country has to repay to India.
  • But India-Sri Lanka relations have been tense over Colombo’s decision to cancel a valued container terminal project at Colombo Port, which made India put off the decision.
  • Earlier, in July 2020, the Reserve Bank of India (RBI) extended a USD 400 million credit swap facility to Sri Lanka, which the Central Bank of Sri Lanka settled in February. The arrangement was not extended.

Sri Lanka’s FDI invite

  • Addressing concerns around the recently passed legislation on laws governing the Colombo Port City, which critics fear might be a “Chinese enclave” in the Sri Lankan capital, a team of government Ministers said the China-backed $1.4 billion-Port City, pitted as a financial hub, had the potential to create 83,000 jobs and bring in up to $15 billion in investments.
  • Constitutional experts and opposition legislators argue that the “financial hub”, coming up on reclaimed land adjoining Colombo’s seafront, would enjoy, besides a tax-free status, immunity from Sri Lankan law.
  • It is said by ministers that Sri Lanka would pursue a “non-aligned” foreign policy, amid growing public criticism over the government’s “China-centric” policies.
  • China has been among the top lenders to Sri Lanka, especially since the pandemic struck, offering a $1 billion in loan and a nearly-$ 1.5 billion currency swap facility.

Click here to read About the Colombo Port City

-Source: The Hindu

March 2024