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RBI Signs Currency Swap for Sri Lanka

  • 25 Jul 2020
  • 7 min read

Why in News

Recently, India and Sri Lanka had a virtual meeting in the wake of the Covid-19 pandemic.

  • It was attended by the officials from the Ministry of External Affairs, Ministry of Finance, representatives of the Sri Lankan government and the Export-Import (Exim) Bank.
    • Exim Bank is the premier export finance institution of India.

Key Points

  • The Reserve Bank of India has agreed to a USD 400 million currency swap facility for Sri Lanka till November 2022 to boost the foreign reserves and ensure the financial stability of the country.
    • Currency Swaps are used to obtain foreign currency loans at a better interest rate than could be obtained by borrowing directly in a foreign market.
      • Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.
    • The decision comes five months after Sri Lankan Prime Minister Mahinda Rajapaksa had visited New Delhi and a recent bilateral discussion on rescheduling Colombo’s outstanding debt repayment to India.
    • Sri Lanka owes USD 960 million to India.
  • Government and industry representatives from both countries also participated in a webinar on ‘Deepening Economic Collaboration between India and Sri Lanka’, organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) in association with other institutes.
    • Sri Lanka highlighted that non-tariff barriers in receiving countries create difficulties in market access.
      • A nontariff barrier is a way to restrict trade by using barriers other than a tariff. These include quotas, embargoes, sanctions, and levies.
    • To resolve that, it urged FICCI to collaborate with the Sri Lankan Mission in New Delhi to help boost the export of its spices and concentrates to the Indian market.

Current Dynamics of India-Sri Lanka Relations

  • Sri Lanka has not commented anything on the ongoing conflict between India and China, both of which are its closest partners.
  • Sri Lanka has not taken any final decision on the East Container Terminal (ECT) project at the Colombo Port.
    • There have been widespread protests alleging the Sri Lankan Government of giving away national assets to India even though Sri Lanka’s Port Authority will retain 100% ownership of the facility.
    • In 2019, Sri Lanka, India and Japan signed a tripartite Memorandum of Cooperation and agreed to jointly develop the ECT Project.
  • In November 2019, India announced a USD 450 million Line of Credit to Sri Lanka, to help strengthen its infrastructure and economy which showed a proactive, relation-building approach.
  • India assisted Sri-Lanka in tackling Covid-19 and also helped in the ‘Suwa Seriya’ ambulance service. The assistance shows good links in the health sector, including telemedicine, between both countries.
  • Popular Tamil leaders in Sri Lanka still invoke India on the pending political solution to the Tamil question, which at times can give an impression of India interfering in internal matters of Sri Lanka.
    • In 1983, India played an active role in the war between Sri Lankan Tamils and the Sinhalese majority.
    • In 1987, the Indo-Lanka Accord was signed to provide a political solution to Sri Lanka’s conflict.
    • It proposed the establishment of a provincial council system and devolution of power for nine provinces in Sri Lanka (also known as The Thirteenth Amendment).
    • However, Tamil leaders feel helpless and keep appealing to India but with its growing geopolitical concerns in the region, India is unlikely to take any strong position on the issue now.
  • Concerns:
    • The Sri Lankan President pointed towards India’s varying amounts of developmental assistance in the northern Tamil region and highlighted the discriminatory tendencies.
    • India’s attitude and relationship with her immediate neighbours depend on their appreciation of India’s regional security concerns.
      • India expects her neighbours to serve as buffer states in the event of an extra-regional threat and not proxies of the outside powers.
  • Suggestions:
    • Both countries can explore possible collaborations in textiles, information technology and agribusiness, few of the sectors on which India has a stronghold.
    • Sri Lanka should facilitate, protect and promote a liberal ecosystem for Indian investors and welcome Indian businesses in developing industrial zones, automotive components, pharma, textiles and engineering.
    • There should be continued high-level engagement on building economic and people-to-people links.
      • Both of them should focus on increasing the volume and quality of people-to-people links, without assuming they will naturally result from geographical proximity.

Way Forward

  • Relations between India and Sri Lanka have been great as friends and neighbours, comparatively.
  • In the current times of pandemic, the fact that several Indian companies are involved in the race to develop a vaccine presents India with a potentially huge, once-in-a-generation opportunity to cement its goodwill with the neighbourhood by securing regional access to these vaccines.
  • The bilateral relationship between both countries is an important cornerstone of a peaceful and prosperous South Asia. Examples of Singapore-Malaysia and New Zealand-Australia indicate that a smaller country's economic success is tied to having a strong or at least stable relationship with its larger neighbour.

Source: TH

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