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Chinese Yuan swap a dead duck?

16 Oct 2022

  • Central Bank mum on status of idling swap from China 
  • Ex-Dep. Gov. slams decision to include swap in gross reserves count
  • Says funds won’t be usable even after IMF disbursement 
By Shenal Fernando  Despite President Ranil Wickremesinghe announcing in June 2022 that the Central Bank of Sri Lanka (CBSL) would negotiate with the People’s Bank of China (PBoC) to change the conditions of the Yuan 10 billion (equivalent to $ 1.5 billion) currency swap requiring a three-month import cover to draw on the swap, there has been no development on that end, raising questions on whether the CBSL has resigned itself to treating the swap as a dead duck.   Despite repeated attempts by The Sunday Morning Business over the past few weeks to obtain a comment from the CBSL on the current status of its negotiations with the PBoC on changing the import cover conditions, all such queries were vociferously rebuffed. Speaking to The Sunday Morning Business, Economist and former Deputy Governor of the CBSL Dr. W.A. Wijewardena stated this swap had been included in the Gross Official Reserves calculations by former Governor of the CBSL Ajith Nivard Cabraal to surreptitiously raise the reported Gross Official Reserves figures of the country in the face of rising public criticism. Elaborating further, he stated: “This particular swap facility is not usable because of this three-month import cover requirement. Even if it was usable, it should not have been included in the gross reserves because this swap is in Chinese Yuan, which is not a reserve currency from our point of view. In the recent presentation made to the creditors, the CBSL had clearly demarcated this Chinese Yuan swap from the rest of the usable reserves.  “Currently, our actual usable foreign reserves are near zero. The continued inclusion of this swap in our foreign reserve calculation is merely an accounting trick to boost our reserve figures. We are misleading the whole world because of the actions of the former Governor. Now the CBSL cannot correct it, because if it does so it would be undermining itself.” He further stated that even if Sri Lanka were to receive International Monetary Fund (IMF) Executive Board approval for the $ 2.9 billion 48-month Extended Fund Facility (EFF), fund disbursements would be made bi-annually. Accordingly, the first tranche received under the EFF will only be around $ 350 million.  Therefore, even if Sri Lanka were to receive some bridge financing, it will not be enough to raise its foreign reserves from its current level of $ 1.7 billion to a level sufficient for a three-month import cover (the monthly import bill is around $ 1.3-1.4 billion).  As a result, it is clear that the use of this Yuan 10 billion swap facility from PBoC will depend entirely on the ability of the CBSL to renegotiate these conditions of the swap requiring a three-month cover to draw on the facility. However former CBSL Governor Dr. Indrajit Coomaraswamy, speaking at a webinar hosted by the CBSL’s Centre for Banking Studies (CBS) in June 2022, opined that China would not be willing to alter the conditions that render the three-year swap unusable in the near future, as it could then be termed a loan facility and thus Sri Lanka would come under pressure from the IMF and others to include it in the stock of debt to be restructured. “That would clearly be a disadvantage for China and that is why it is hesitating to remove that condition, which would enable Sri Lanka to use that money,” he stated. The absence of any information from the CBSL and its radio silence on the matter gives rise to questions of whether the CBSL has resigned itself to treating this swap facility as a dead duck, whose only utility lies in its ability to raise the country’s gross reserves on paper.    


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