Indian currency swap will help but not totally salvage Sri Lanka’s forex crisis, Moody’s says
View(s):Recent foreign exchange inflows from India under a currency swap with the Sri Lankan government will help ease pressure on the country’s balance of payments, a top rating agency said on Thursday. “However, recourse to such official funding also highlights the fact that Sri Lanka’s foreign exchange earnings and reserves fall short of its external financing requirements,” Moody’s said.
In a report titled “Sri Lanka, Government of: Swap Lines from India Provide a Financing Stop-Gap Before Potential IMF Program”, the agency said that on March 19, Sri Lanka received a US$700 million currency swap from India through the Reserve Bank of India (RBI), two days after securing a $400 million swap under the RBI’s South Asian Association for Regional Co-operation (SAARC) facility.
“These arrangements, which replace the RBI swap line that expired the week before, will offset in the near term the balance of payments pressures posed by slowing capital inflows and more recently a dip in remittance inflows. Sri Lankan authorities are also negotiating a more medium-term financing arrangement with the International Monetary Fund (IMF),” the agency said in an announcement.
The swap lines and potential IMF financing demonstrate Sri Lanka’s access to official funding during periods when global market financing is becoming more difficult. “However, recourse to such official funding also highlights the fact that Sri Lanka’s foreign exchange earnings and reserves fall short of its external financing requirements. Moreover, these requirements have increased due to the country’s large fiscal deficits and the role that external funding has played in supporting domestic economic activity,” it said.
While the official financing will alleviate immediate external liquidity risks, Sri Lanka’s balance of payments is unlikely to meaningfully stabilise without a reduction in government deficits and debt, as well as an acceleration in non-debt sources of external financing, such as foreign direct investment (FDI), Moody’s noted.