India's currency swap agreements would help South Asian economies

While countries of the South Asian region are taking individual steps to battle COVID-19, currency swaps have emerged as an important tool of economic cooperation in the region, writes Partha Pratim Mitra  for South Asia Monitor

Partha Pratim Mitra Jul 29, 2020
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As South Asian countries intensify the fight against COVID-19, it is imperative that social protection programmes, including cash transfers, food vouchers,  unemployment benefits, pensions, wage subsidies, be at the forefront of the relief and recovery efforts. The success of the relief packages has been typically determined by the strength of existing social protection systems. 

In India, the central government provided additional cash transfers and extend food ration benefits. The government has also expanded the provision of public works through the Pradhan Mantri Garib  Rozgar Yojana (an initiative to tackle the impact of COVID-19 on migrant workers in India) to ensure that migrants returning to their villages have access to jobs and wages. The Pakistan government used the National Socio-Economic Registry, which includes close to  80 percent of the population, to identify beneficiaries. In addition to the current 4.5 million recipients of the Benazir Income Support Programme, the programme was scaled up to reach 7.5 million households. The integrated system is expected to allow the government to reach at least 12 million families. Sri Lanka followed a similar path, using its Samurdhi cash transfer program to provide relief to the household. Smaller countries like the Maldives and Bhutan took advantage of their high internet or cell phone penetration rates to reach potential beneficiaries to facilitate registration and enrolment.

Social protection programmes in South Asia

Social protection programmes are also critical to a strong economic recovery, provided they address the needs of both households and businesses. In Sri Lanka and Bangladesh, governments are providing support to private sector businesses to cover the wage payments of their employees. In the Maldives and Pakistan, the government has provided relief on payment of utility bills either by deferring payments or through subsidies.

While countries of the South Asian region are taking individual steps to battle COVID-19, currency swaps have emerged as an important tool of  conomic cooperation in the region. Such swaps become important when funding in local currency becomes difficult. But if the home central bank has a swap line with a foreign central bank, the home central bank can provide its banks with the required liquidity in foreign currency without using its foreign exchange reserves. Such swaps came into play when the global financial crisis started in 2007 and banks, with limited access to dollar funding, became highly reluctant to lend to one another, owing to fears about the true creditworthiness of each other. This pushed up the cost of borrowing, as lenders demanded higher interest rates to compensate for rising risks of lending. Hence to address the issue, central banks in developed countries agreed to provide swap lines to one another. 

Following the outbreak of COVID-19 in the region, India had proposed a virtual meeting to discuss the request of Sri Lanka for relief on its external debt front. Sri Lanka owes $960 million to India. To mitigate the situation and given the past record of utilising currency swaps as a tool of easing the foreign exchange crunch and help ease the repayment of external debt of Sri Lanka, the Reserve Bank of India (RBI) has agreed to a $400 million currency swap facility for Sri Lanka till November 2022. Currency swaps are used to obtain foreign currency loans at a better interest rate than could be got by borrowing directly in a foreign market. The RBI’s action follows a recent bilateral ‘technical discussion’ on rescheduling Colombo’s outstanding debt repayment to India. The meeting, in which officials from the Ministry of External Affairs, Ministry of Finance, and the EXIM Bank interacted with representatives of the Sri Lankan government, came after the Sri Lankan Prime Minister Mahinda Rajapaksa had sought a loan moratorium, during his visit to New Delhi in February this year. 
       
The RBI has signed an agreement for extending the $ 400 million currency swap facility to Sri Lanka to boost the island economy's foreign exchange reserves and financial stability.

The COVID-19 outbreak has substantially weakened the economic outlook of Sri Lanka. The external current account deficit is estimated to have narrowed to 2.2 percent of GDP in 2019, due to a reduction in imports, despite the slowdown in tourism receipts. The issuance of international sovereign bonds (USD 4.4 billion) helped debt repayment. However, reserves are low relative to short-term external liabilities. The exchange rate remained broadly stable despite depreciation pressures in March and April 2020. Fiscal parameters, however,  deteriorated in 2019. Tax revenues fell due to a weak collection of Value-Added Tax (VAT), excise, and import taxes. Meanwhile, expenditures also increased due to relief packages adopted and the implementation of expansionary budget proposals. As a result, the budget deficit rose to 6.8 percent of GDP. The central government debt-to-GDP ratio is high (87 percent), with more than half of the debt denominated in foreign currency. International rating agencies Fitch and S&P Global Ratings revised Sri Lanka’s outlook from stable to negative on account of rising risks to debt sustainability.
 
India and its role in SAARC

The RBI made a Special Currency Swap Agreement with the central banks of the region. The agreements are a result of the gesture of successive Indian governments to strengthen economic cooperation in the region. The swap arrangements are intended to provide an immediate line of funding for the South Asian Association for Regional Cooperation (SAARC) member countries to meet any balance of payments and liquidity crises till longer-term arrangements are made or if there is a need to increase short-term liquidity due to the stressed market conditions.  In May 2012, the Governor of RBI had announced in the SAARC FINANCE Governor’s meeting, held in Nepal, that the RBI would offer swap facilities aggregating US$ 2 billion, both in foreign currency and Indian Rupee to neighbouring countries of the region. 
 
The facility is available to all SAARC member countries,  i.e., to Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka. In pursuance of such an arrangement the RBI on March 8, 2013, signed the first Currency Swap Agreement with the Royal Monetary Authority of Bhutan (RMAB). The RMAB could make withdrawals of US Dollar, Euro, or Indian Rupee in multiple tranches up to a maximum of US$ 100 million or its equivalent. The agreement is valid for a period of three years from the date of signing. 

Subsequently, on March 25, 2015, the RBI had signed a Currency Swap Agreement with the Central Bank of Sri Lanka for USD 400 million under the existing SAARC Currency Swap Framework within the overall limit of USD 2 billion. Under the arrangement, the Central Bank of Sri Lanka can draw up to US$ 1.1 billion for a maximum period of six months. The agreement is valid for a period of three years from the date of signing. The arrangement will also further financial stability in the region. On July 17, 2015, the RBI signed another Special Currency Swap Agreement with the Central Bank of Sri Lanka. Under the arrangement, the Central Bank of Sri Lanka can draw up to US$ 1.1 billion for a maximum period of six months. The proposal to extend the additional currency swap facility of USD 1.1 billion for the limited period was agreed upon by the Indian government in April 2015 based on the recommendation of the RBI for mitigating the possible currency volatility in the spirit of strengthening India’s bilateral relations and economic cooperation with Sri Lanka.

The RBI in March 2016 signed yet another Special Currency Swap Agreement with the Central Bank of Sri Lanka. Under the arrangement, the Central Bank of Sri Lanka can draw up to US$ 700 million for a maximum period of three months. This special arrangement is in addition to the existing framework on Currency Swap Arrangement for the SAARC members. The proposal to extend the additional currency swap facility of US$ 700 million to Sri Lanka for a limited period was decided with concurrence of the government in for short-term liquidity management in the context of India’s strong bilateral relations and economic ties with Sri Lanka.

The RBI in keeping with India's policy of strengthening economic cooperation also announced the extension of SAARC Swap Arrangement till November 14, 2017. The swap amount available to various member central banks had been arrived at broadly based on two months' import cover subject to a floor of US $ 100 million and a maximum of US$ 400 million per country. On March 17, 2016, the RBI also signed a Currency Swap Agreement with the RMAB. Under the arrangement, the RMBA can make withdrawals of US dollar, Euro, or Indian Rupee in multiple tranches up to a maximum of US$ 100 million or its equivalent. This is expected to further economic co-operation between the two countries. The agreement is valid for a period of three years from the date of signing.

The RBI, in furtherance of  India's policy to strengthen bilateral ties and bring about financial stability in the South Asian region, announced the Framework on Currency Swap Arrangement for SAARC countries for the period 2019 to 2022. Based on the terms and conditions of the framework, the RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility. Under the Framework for 2019-22, RBI will continue to offer swap arrangement within the overall corpus of US $ Two billion. The withdrawals can be made in US Dollar, Euro, or Indian Rupee. The framework provides certain concessions for swap withdrawals in Indian Rupee.

India's currency swap arrangement with countries of the South Asian region would ease the difficult economic situation of individual countries and would help in strengthening economic cooperation that is so very important to face the tough conditions in the aftermath of the COVID-19 pandemic.

(The writer is a retired Indian Economic Service officer who worked in the labour ministry. The views expressed are personal. He can be contacted at ppmitra56@gmail.com)

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