ECONOMYNEXT – Sri Lanka has started to repay a swap with the Bangladesh central bank from which 200 million US dollars was borrowed during the worst currency crisis in the island’s history.
Sri Lanka’s central bank has repaid 50 million dollars on August 17, Bangladesh’s The Daily Star Newspaper reported.
Bangladesh expects the next installment within two weeks, the newspaper said.
“We are hopeful that the entire amount will be cleared by September,” the newspaper quoted Md Mezbaul Haque, spokesman for the Bangladeshi Central Bank as saying.
Initially, Sri Lanka was supposed to repay the amount within three months.
Bangladesh lent the money to Sri Lanka in three installments within 2021. On August 19 2021 the first tranche of 50 million dollars was sent, following which the second installment of 100 million dollars was installed, and a final 50 million dollars in September.
Sri Lanka was to repay the loan by the end of 2021, with an interest rate of LIBOR + 2 percent.
During the economic crisis, the repayment was extended multiple times. The final extension to September this year was made in May 2022, with the interest rate fixed at LIBOR + 2.5 percent.
Sri Lanka’s central bank in the course of mis-targeting, not only ran down its own reserves and printed money to prevent rates from going up (sterilised interventions) but also borrowed money from elsewhere and ran them down.
Central bank swaps were invented by the US Federal Reserve in the course of mistargeting rates in the late 1960 which eventually led to the collapse of the Bretton Woods system of soft-pegs and brought down the gold standard along with it.
Money printed by the Fed to target output (lean against the wind and similar policies) led to dollar notes being accumulated in other central bank with prudent policy in the same was as over-issuing notes accumulated and were returned to the errant bank in the free banking era, analysts say.
There is nothing in a new IMF backed monetary law to prevent such occurrences in the future according to critics.(Colombo/Aug/22/2023)