Know all about Currency Swapping

By Sudheer Kumar K|Updated : July 17th, 2021

Bangladesh Bank, Bangladesh’s central bank, has recently approved a $200 million currency swap agreement with Sri Lanka. This swap arrangement will help Sri Lanka tide over its foreign exchange crisis.

 

 

What is a Currency Swap? 

A currency swap is nothing but a transaction in which two parties (countries or banks) exchange an equivalent amount of money with each other but in different currencies. Currency swap is essentially a loan agreement between two parties, in which parties agree to swap back these quantities of their two currencies at a specified date in the future at a specified exchange rate or market rate.
 
For example, the US has made $100 million currency swap agreement with India, India receives $100 million in Dollars at current market exchange rate (for example, $1 = Rs. 70) and India repays this loan in future at agreed exchange rate to the US (Rs. 7000 million) in rupees, but not in dollars.

Bangladesh - Sri Lanka Currency Swap Agreement

currency swap is effectively a loan that a country, in this context, Bangladesh will give to Sri Lanka in dollars, with an agreement that the debt will be repaid with interest in Sri Lankan rupees.
For Sri Lanka, this swap arrangement with Bangladesh is cheaper than borrowing from the market, and a lifeline as is it struggles to maintain adequate forex reserves even as repayment of its external debts looms. The period of the currency swap will be specified in the agreement.

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