• ¥ 10 billion swap increased reserves to $ 3.1 billion
• Cabraal, CBSL, and Govt. shouldn’t celebrate this: Wijewardena
• Adds swap is to pay bills from China, not to repay debts
• Swap was entered into in March, before Cabraal’s appointment: Rasika Jayakody

    BY Shenal Fernando The People’s Bank of China (PBoC) released a receipt of the ¥ 10 billion (equivalent to $ 1.5 billion) currency swap to the Central Bank of Sri Lanka (CBSL) yesterday (29), increasing the official foreign reserves of Sri Lanka to $ 3.1 billion, according to the CBSL.  CBSL Governor Ajith Nivard Cabraal announced yesterday on his official Twitter handle that due to the receipt of recent foreign exchange inflows, the official foreign reserves position of the country had reached approximately the aforementioned level and will remain at that level till the end of 2021. Neither Cabraal nor the CBSL, in its press release issued yesterday, specified the exact source of the recent foreign exchange inflows. However, speaking to The Morning Business yesterday, a high-ranking source in the CBSL confirmed that this increment in the official reserve position of the country was due to the receipt of the ¥ 10 billion swap from China. It was further stated that the discussions relating to the $ 1.9 billion financial assistance from India have reached its final stages. This expected financial assistance from India will be in the form of a $ 400 million currency swap to help Sri Lanka address the existing balance of payment (BOP) issues; a $ 1 billion line of credit to cover the import of food, medicines, and other essential items from India to Sri Lanka; and a $ 500 million line of credit to cover the import of fuel from India. The CBSL entered into a bilateral swap agreement for ¥ 10 billion with the PBoC in March 2021, well before Cabraal’s appointment as the Governor, with the view of promoting bilateral trade and direct investment for economic development of the two countries, and to be used for other purposes agreed upon by both parties. This agreement is valid for three years. Samagi Jana Balawegaya (SJB) NextGenSL Co-Convenor Rasika Jayakody too yesterday noted that the swap was entered into in March 2021 and Cabraal had hoodwinked the general public and certainly did not take pride in this swap.  During the Monetary Policy Review No. 8 of 2021 held on 25 November 2021 Cabraal defended the utility of this Chinese yuan-denominated currency, pointing to the fact that it is well recognised that the Chinese yuan is an international reserve currency. He further claimed that the ¥ 10 billion currency swap with the PBoC is available to Sri Lanka and will be kept on standby to be drawn when needed, whereupon it will be considered as part of the country’s foreign reserves. However, speaking to us yesterday, former CBSL Deputy Governor Dr. W.A. Wijewardena stated: “We have to appreciate the Chinese support which gives us a temporary reprieve and thank them, because when someone throws even something little to a beggar, that is valuable, but it is not a reason for Governor Cabraal, the CBSL, and the Government to eat kiribath (milk rice). Without going to the IMF we cannot resolve our issues. This is just a temporary relief.”   Explaining further he stated that although this currency swap in Chinese yuan cannot be used for US dollar-denominated debt settlement it will be valuable, as it can fund importation of goods from China. However, according to Wijewardena, this ¥ 10 billion ($ 1.5 billion) swap is “peanuts” considering that the average monthly import bill is around $ 1.8 billion. Therefore, it can be used to fund Chinese imports in the near term, but without going to the IMF, it is unlikely that Sri Lanka will be able to resolve it, claimed Wijewardena He further claimed that Sri Lanka’s strategy of building up its foreign reserves through external borrowing is one of the reasons why Sri Lanka has been downgraded by rating agencies who have stated that Sri Lanka should build its reserves through earned foreign exchange rather than borrowed foreign exchange.  “While this support by China should be appreciated, It doesn’t help Sri Lanka improve its credit rating, improve its position in the international sovereign bond (ISB) market, or improve Sri Lanka’s credit worthiness in the eyes of foreign investors,” stated Wijewardena. The dismal state of Sri Lanka’s foreign reserves has drawn the attention of the general public over the past few months as the resulting forex liquidity issues and import restrictions have disrupted regular trading activities within the country. Prior to this recent strengthening of the foreign reserves to around $ 3.1 billion, it had fallen to a 12-year low of $ 1.6 billion by the end of November, down 30% from October. From the remaining reserves, liquid foreign currency reserves amount to only $ 1.0 billion, which are sufficient to cover only around three weeks of imports, according to CBSL data. Building up Sri Lanka’s foreign reserves in the near term will be crucial in order to satisfy the foreign currency debt service payments of the country, which, including principal and interest, amount to $ 6.9 billion in 2022. This includes the two ISB payments of $ 500 million due in January 2022 and $ 1 billion due in July 2022. Furthermore, the cumulative foreign currency debt service payments of Sri Lanka over the period 2022-2026, including interest and principal, amount to about $ 26 billion. Issuing a statement yesterday after receiving the swap from China, the CBSL stated that it is unfortunate that the hasty and inexplicable decisions of certain rating agencies to downgrade the sovereign, even in the face of clear reassurances of impending forex inflows had caused unnecessary losses in the secondary market to investors in ISBs issued by the Government of Sri Lanka.  “Such rating actions also weighed negatively on investor confidence, resulting in undue delays in certain expected foreign currency inflows, which may have materialised earlier, if not for such unwarranted and questionable rating actions.”