$1.5 Bn China-Lanka Currency Swap Deal Came With Impractical Conditions

The currency swap worth $1.5 billion provided by China in December last year cannot be utilised by the Central Bank of Sri Lanka as it came with a condition that Sri Lanka must have sufficient foreign reserves to cover imports for several months, a threshold that was not met even in December, before reserves began dwindling rapidly, The Morning Business has learnt.

According to former Central Bank of Sri Lanka (CBSL) Governor Dr Indrajith Coomaraswamy, China would not be willing to alter the conditions that render the three-year swap unusable in the near future, as it could then be termed a loan facility, and thus Sri Lanka would come under pressure from the International Monetary Fund (IMF) and others to include it in the stock of debt to be restructured.

“Therefore, that would clearly be a disadvantage for China, which is making them hesitate in terms of taking off that condition to enable Sri Lanka to use that money,” Coomaraswamy said at a webinar held by the CBSL’s Centre for Banking Studies (CBS). Therefore, it would be a challenge to convert the Chinese Yuan swap of (CNY) 10 billion into usable form, he added.

He explained that the CBSL and People’s Bank of China (PBoC) entered into a currency swap agreement for CNY 10 billion in March 2021, valid for three years “with a view to promoting bilateral trade and direct investment for economic development”.

However, a statement issued by CBSL after the swap agreement was signed said that both central banks agreed to use the swap “for other purposes agreed upon by both parties”. This swap agreement was approved by the Cabinet at the time, on recommendation of the CBSL’s Monetary Board.

The amount under the swap agreement ($1.5 billion) was included in the CBSL’s official foreign reserves in December 2021, raising reserves to $3.1 billion by the end of 2021.

Last month, CBSL Governor Dr Nandalal Weerasinghe said that the Chinese swap could not be used for any purchases at the moment due to the conditions of the swap laid out by the People’s Bank of China (PBoC). “We have requested a discussion with the Chinese Embassy, so that they will release it in a manner in which we can use it,” the Governor said. He noted that the discussions with the Chinese authorities would target the use of the swap to at least fund Chinese imports to Sri Lanka.

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