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The central bank is going to lend debt-strapped Sri Lanka $200m from forex reserve through a currency swap deal
The Bangladesh Bank is going to provide a $200 million loan to debt-ridden Sri Lanka from the foreign exchange reserve, deviating from its internal treasury investment guideline as the borrowing country does not comply with the standard rating requirement for receiving such an investment.
This is the first time that the central bank is going to make such an investment in a country through a currency swap deal.
The board of the Bangladesh Bank recently approved the agreement under special consideration in response to a request for liquidity support from Sri Lanka.
The central bank made the investment decision at a time when Sri Lanka is at risk of defaulting according to global rating agencies.
The internal treasury investment guideline says the Bangladesh Bank can invest its foreign exchange reserve in high-rated bills and bonds of different countries like the US treasury bills.
Global rating agency S&P cut Sri Lanka's long-term foreign currency credit rating to CCC+ from B- for 2020, which exposed the risk of default for the island nation.
Sri Lanka's credit score is now the same as the one assigned to Argentina, Mozambique, and Belize.
Another global rating agency Moody's, which the Bangladesh Bank mostly considers in case of making investments, also downgraded the Sri Lankan government's long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 in September last year.
The rating assessment reflects that the coronavirus-induced shock will significantly weaken Sri Lanka's already fragile funding and external positions.
Heightened liquidity and external risks stem from Sri Lanka's limited secured funding sources to meet its material external debt service payments over the coming years, during which market refinancing will remain vulnerable to shifts in investor sentiment, according to Moody's assessment.
Under the swap deal, the Bangladesh Bank will provide the fund at 2% interest, which is higher than other current global rates. The deal will be for one year during which the fund will be provided. After getting the fund, Sri Lanka will have to repay it by three months.
According to the deal, the Sri Lankan government will exchange their currency with the Bangladesh Bank equivalent to the amount of dollars they will be given. There will be a government guarantee also.
The country has taken funds through such swap deals also from India and China.
The currency swap initiative was taken after Sri Lankan Prime Minister Mahinda Rajapaksa's visit to Bangladesh in March to join the twin celebrations of the golden jubilee of independence and the birth centenary of Bangabandhu Sheikh Mujibur Rahman.
High foreign exchange reserve prompted the central bank to make such a high-risk investment, said a senior executive of the central bank.
The country's foreign exchange reserve stood at nearly $44 billion in the first week of May, according to the Bangladesh Bank data, which is enough for meeting import expenditures for nearly eight months.
The International Monetary Fund considers foreign exchange reserve adequate when the balance is enough for meeting import expenditures for three to eight months.
When asked about the deviation from the investment guideline made for the swap deal, Deputy Governor Kazi Sayedur Rahman, who has been in charge of managing foreign exchange reserve for a long time, declined to comment.
"There is no risk in this investment because we have a good position in foreign exchange reserve," said Md Serajul Islam, executive director and spokesperson for the Bangladesh Bank.
Moreover, the return from the investment is higher than that from others, he said.
When contacted, Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, said the risk of this investment is higher than the return.
"I do not see any reason for improving diplomatic relations with Sri Lanka by making such a financial commitment," he said.
He said Bangladesh's foreign exchange reserve is adequate but not high.
Import is already on the rise and commodity prices will be high in the coming days, which will increase import expenditures, Zahid Hussain said.
"The current foreign exchange reserve is adequate for meeting import costs for eight months. In normal times, monthly imports would amount to $5-6 billion. When global commodity prices, including fuel costs, will rise, it will put pressure on the reserve," the economist explained.
Bangladesh's imports were rising as economic activities continued to be normal over a few months before the onset of the second wave of coronavirus.
Consequently, the surplus in the current account balance started to decrease and in March, the surplus dropped sharply on the back of imports of rice and industrial raw materials.
In the July-March period of the current fiscal year, the current account surplus dropped to just $125 million from $1.36 billion in the July-February period.
In February, the surplus dropped by $652 million.
According to an updated report released by the Bangladesh Bank on Thursday, during the July-March period, imports increased by 6% to $42.76 billion compared to the same period in the last fiscal year.
The government's spending on increasing rice imports to enhance food stocks has played a role in growing imports. In addition, imports of intermediate raw materials used in industrial production, including crude oil, have also increased significantly.
In the first nine months of the current fiscal year, the government spent about $2 billion on rice imports, up 41% from the same period in the last fiscal year.
At the same time, consumer goods imports rose by 4.39% to $2.86 billion.
Source
The Bangladesh Bank is going to provide a $200 million loan to debt-ridden Sri Lanka from the foreign exchange reserve, deviating from its internal treasury investment guideline as the borrowing country does not comply with the standard rating requirement for receiving such an investment.
This is the first time that the central bank is going to make such an investment in a country through a currency swap deal.
The board of the Bangladesh Bank recently approved the agreement under special consideration in response to a request for liquidity support from Sri Lanka.
The central bank made the investment decision at a time when Sri Lanka is at risk of defaulting according to global rating agencies.
The internal treasury investment guideline says the Bangladesh Bank can invest its foreign exchange reserve in high-rated bills and bonds of different countries like the US treasury bills.
Global rating agency S&P cut Sri Lanka's long-term foreign currency credit rating to CCC+ from B- for 2020, which exposed the risk of default for the island nation.
Sri Lanka's credit score is now the same as the one assigned to Argentina, Mozambique, and Belize.
Another global rating agency Moody's, which the Bangladesh Bank mostly considers in case of making investments, also downgraded the Sri Lankan government's long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 in September last year.
The rating assessment reflects that the coronavirus-induced shock will significantly weaken Sri Lanka's already fragile funding and external positions.
Heightened liquidity and external risks stem from Sri Lanka's limited secured funding sources to meet its material external debt service payments over the coming years, during which market refinancing will remain vulnerable to shifts in investor sentiment, according to Moody's assessment.
Under the swap deal, the Bangladesh Bank will provide the fund at 2% interest, which is higher than other current global rates. The deal will be for one year during which the fund will be provided. After getting the fund, Sri Lanka will have to repay it by three months.
According to the deal, the Sri Lankan government will exchange their currency with the Bangladesh Bank equivalent to the amount of dollars they will be given. There will be a government guarantee also.
The country has taken funds through such swap deals also from India and China.
The currency swap initiative was taken after Sri Lankan Prime Minister Mahinda Rajapaksa's visit to Bangladesh in March to join the twin celebrations of the golden jubilee of independence and the birth centenary of Bangabandhu Sheikh Mujibur Rahman.
High foreign exchange reserve prompted the central bank to make such a high-risk investment, said a senior executive of the central bank.
The country's foreign exchange reserve stood at nearly $44 billion in the first week of May, according to the Bangladesh Bank data, which is enough for meeting import expenditures for nearly eight months.
The International Monetary Fund considers foreign exchange reserve adequate when the balance is enough for meeting import expenditures for three to eight months.
When asked about the deviation from the investment guideline made for the swap deal, Deputy Governor Kazi Sayedur Rahman, who has been in charge of managing foreign exchange reserve for a long time, declined to comment.
"There is no risk in this investment because we have a good position in foreign exchange reserve," said Md Serajul Islam, executive director and spokesperson for the Bangladesh Bank.
Moreover, the return from the investment is higher than that from others, he said.
When contacted, Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, said the risk of this investment is higher than the return.
"I do not see any reason for improving diplomatic relations with Sri Lanka by making such a financial commitment," he said.
He said Bangladesh's foreign exchange reserve is adequate but not high.
Import is already on the rise and commodity prices will be high in the coming days, which will increase import expenditures, Zahid Hussain said.
"The current foreign exchange reserve is adequate for meeting import costs for eight months. In normal times, monthly imports would amount to $5-6 billion. When global commodity prices, including fuel costs, will rise, it will put pressure on the reserve," the economist explained.
Bangladesh's imports were rising as economic activities continued to be normal over a few months before the onset of the second wave of coronavirus.
Consequently, the surplus in the current account balance started to decrease and in March, the surplus dropped sharply on the back of imports of rice and industrial raw materials.
In the July-March period of the current fiscal year, the current account surplus dropped to just $125 million from $1.36 billion in the July-February period.
In February, the surplus dropped by $652 million.
According to an updated report released by the Bangladesh Bank on Thursday, during the July-March period, imports increased by 6% to $42.76 billion compared to the same period in the last fiscal year.
The government's spending on increasing rice imports to enhance food stocks has played a role in growing imports. In addition, imports of intermediate raw materials used in industrial production, including crude oil, have also increased significantly.
In the first nine months of the current fiscal year, the government spent about $2 billion on rice imports, up 41% from the same period in the last fiscal year.
At the same time, consumer goods imports rose by 4.39% to $2.86 billion.
Source
