• Currency swap with PBC unusable for over 28 months 
• China hesitant to alter conditions 

Sri Lanka is likely to soon have access to the contentious CNY 10 billion (equivalent to $ 1.5 billion) currency swap with the People’s Bank of China (PBC), as the country is on the verge of being in compliance with the three-month import cover required under the terms of the currency swap agreement.

Speaking to The Sunday Morning Business, a high-ranking source at the Central Bank of Sri Lanka (CBSL) pointed out that although the official reserves of the country stood at over $ 3.7 billion as of end-June, this figure included the CNY 10 billion currency swap. 

The source revealed that in order to comply with the three-month import cover required under the terms of the currency swap agreement, the official reserves must be calculated without considering the CNY 10 billion. 

Accordingly, while conceding that Sri Lanka was yet to be in compliance with the three-month import cover requirement, the source revealed that Sri Lanka was close to meeting it.

This represents a very positive development in this saga, with the currency swap remaining unusable for over 28 months.  

The source further said: “Firstly, we have to meet the conditions. We intend to use the funds once we meet the conditions.” 

In June 2022, President Ranil Wickremesinghe revealed in Parliament that the CNY 10 billion currency swap with the PBC required a three-month import cover to draw on the swap and that the CBSL would seek to negotiate the condition with the PBC. 

Similar assertions were subsequently made by CBSL Governor Dr. Nandalal Weerasinghe. 

Amidst Sri Lanka’s economic crisis, this three-month import cover requirement essentially rendered the currency swap unusable and limited its utility to merely propping up the country’s official reserves on paper. 

It was reported that the CBSL had made several overtures to amend the terms of the currency swap, which were not favourably received.

In fact, former Governor of the CBSL Dr. Indrajit Coomaraswamy, speaking at a webinar hosted by the CBSL Centre for Banking Studies (CBS) in June 2022, opined that China would not be willing to alter the conditions 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. 

“That would clearly be a disadvantage for China, which is why it is hesitating to remove that condition, which would enable Sri Lanka to use that money,” he stated.

CBSL and PBC entered into the currency swap agreement for CNY 10 billion in March 2021 with a validity period of three years “with a view to promoting bilateral trade and direct investment for economic development” between the two countries. 

However, a statement by the CBSL after the swap agreement was signed said that both Central Banks had agreed to use the swap “for other purposes agreed upon by both parties”.