The Bangladesh Bank would lend $200 million from its foreign exchange reserve to debt-ridden Sri Lanka, departing from its internal treasury investment policy because the borrower country does not meet the usual rating threshold for getting such a loan. This is the first time a central bank would invest in a country through a currency exchange agreement.
In response to a request for liquidity assistance from Sri Lanka, the Bangladesh Bank’s board of directors recently accepted the deal under special consideration. The central bank made the investment choice when international rating agencies believe Sri Lanka is on the verge of defaulting.
According to the Bangladesh Bank’s internal treasury investment policy, the bank can invest its foreign exchange reserve in high-rated bills and bonds from various nations, such as US treasury bills. S&P downgraded Sri Lanka’s long-term foreign currency credit rating to CCC+ from B- for 2020, exposing the island nation to the danger of default.
Sri Lanka’s credit rating has now equaled that of Argentina, Mozambique, and Belize. The Sri Lankan government’s long-term foreign-currency issuer and senior unsecured ratings were reduced to Caa1 from B2 in September last year by another global rating agency, Moody’s, which the Bangladesh Bank usually evaluates when making investments. According to the rating assessment, the coronavirus-induced shock would considerably damage Sri Lanka’s already precarious financing and external situations.
According to Moody, increased liquidity and external risks originate from Sri Lanka’s limited secured funding sources to fulfill its significant external debt service payments in the following years, during which market refinancing will be subject to fluctuations in investor opinion.
The Bangladesh Bank will give the funds at a rate of 2% interest under the swap agreement, which is higher than other existing worldwide rates. The agreement is for a one-year period, during which time the funds will be given. Sri Lanka will have three months to refund the money after receiving it.
According to the agreement, the Sri Lankan government will exchange money with the Bangladesh Bank is equal to the number of dollars received. Also included will be a government guarantee. India and China have also contributed money to the country through swap transactions.
After Sri Lankan Prime Minister Mahinda Rajapaksa visited Bangladesh in March to commemorate the country’s golden jubilee of independence and the birth centennial of Bangabandhu Sheikh Mujibur Rahman, the currency swap project was launched. According to a senior official of the central bank, the central bank’s substantial foreign exchange reserve motivated it to undertake such a high-risk transaction.
According to Bangladesh Bank data, the country’s foreign exchange reserve was approximately $44 billion in the first week of May, enough to cover import expenditures for about eight months. When the balance is sufficient to satisfy import expenditures for three to eight months, the International Monetary Fund deems the foreign currency reserve appropriate.
Deputy Governor Kazi Sayedur Rahman, who has been in charge of maintaining the foreign exchange reserve for a long time, declined to comment when questioned about the divergence from the investment guideline created for the swap agreement.
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