Sri Lanka to get US$400mn RBI swap line shortly: CB Governor

ECONOMYNEXT – Sri Lanka is expecting to get a 400 million dollars swap line from India shortly, Central Bank Governor Indrajit Coomaraswamy said, as the country has lost 1.1 billion US dollars in forex reserves over three months and money was printed after intervening.

Sri Lanka has been negotiating with the Reserve Bank of India to get a 400 million dollar swap line from a facility made available to countries in the South Asia Association for Regional Co-operation (SAARC).

"We are hoping to get that quickly," Governor Coomaraswamy said.

Minister Harsha de Silva said in a message that Sri Lanka was hoping to get up to a billion US dollars in swap lines.

Sri Lanka’s is now facing balance of payments trouble after the central bank printed money saying inflation was low in the first quarter of 2018, despite operating a highly unstable soft-peg.

Central Bank swap lines were invented by the US Federal Reserve when it faced pressure on a gold soft-peg.

The soft – gold peg collapsed in 1971 – 73 when then Federal Reserve Chairman Arthur Burns tried to close an ‘output gap’ by printing money ending the Bretton – Woods system of failed soft-pegs.

The Fed invented swap lines as loose policy led better managed central banks such as Switzerland and Germany, which were driven by Austrian classical economics acquired large dollar balances.

The Fed was driven by Mercantilist-Keynesianism.

The swap lines were at first structured to be for three months (assuming that any pressure on the dollar against gold was temporary) but the lines were extended and losses were palmed off the US Treasury.





The swap lines critics later said, prevented the Fed from practicing more prudent policy, and may be contributed to the collapse of the Bretton Woods system by encouraging bad policy.

At the time it was believed that a central bank could sterilize interventions with impunity on a so-called portfolio-balance channel. However Bretton-Woods collapsed forcing the Fed to float and suspend gold convertibility.

The Fed had also acquired massive liabilities through swap lines by 1978 as the US tried and failed to defend the US dollar. (Carter moves to halt decline of the US dollar).

Fed Governor Paul Volcker later saved the dollar.

There had been concern that swap lines represented a tool through which the Fed avoided congressional approval and took on public liabilities.

Central Banks, especially soft-pegs are poorly understood by the public, politicians and the soft-peggers who run them. (Colombo/Jan02/2018)

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