The Bangladesh Bank has extended the validity of the credit facility it granted to Sri Lanka for three months after the expiration of the first three-month term of the credit facility.
The loan facility was renewed following a request from the island nation, a senior central bank official told New Age on Sunday.
Bangladesh has extended the $ 200 million credit facility under a currency swap agreement with Sri Lanka.
The island nation received the Bangladesh loan facility in three installments.
The BB released $ 50 million as the first tranche of a currency swap deal to back the poorly rated Sri Lanka on August 19, 2021.
The second tranche of $ 100 million was released on August 30, 2021 and the last tranche of $ 50 million was released on September 21, 2021.
Under the agreement, Bangladesh would receive 2 percent plus LIBOR as interest on the loan amount.
If the principal of the deposit remains unpaid even after six months, the applicable interest would be 2.5% plus LIBOR.
“Our assessment is that Sri Lanka would use the fund for at least nine months,” the BB official said.
The impact of the Covid epidemic has been devastating on the island nation’s economy which contracted by 3.4% in 2020.
Tourism, a major source of Sri Lanka’s foreign exchange, has been the most affected sector as the Covid situation has yet to be brought under control.
The economic crisis coupled with a low reserve representing less than two months of import payments also prompted credit rating agencies to downgrade the country and question whether Sri Lanka would be able to provide the service. the $ 1.5 billion line of debt that matures in 2022.
The currency exchange initiative was taken after Sri Lankan Prime Minister Mahinda Rajapaksa visited Bangladesh to join in the celebrations of Bangladesh’s Golden Jubilee of Independence and received BB approval in May .
In addition to receiving $ 200 million from Bangladesh, the island nation also received an additional $ 787 million from the Special Drawing Rights (SDR) allocation from the International Monetary Fund.
Apart from the new phase of the crisis, Sri Lanka has not experienced any default event (on bonds or loans) since 1983.
On the other hand, the Bangladesh reserve was on the rise after the Covid outbreak while the Sri Lanka reserve was under increasing pressure.
Foreign tourists were staying away after deadly suicide bombings in Sri Lanka on Easter Day in 2019, killing more than 250 people. But efforts to revive the industry failed after the pandemic.
Bangladesh’s foreign exchange reserve stood at $ 46.3 billion on Tuesday after hitting a record $ 48 billion from around $ 33 billion a year and a half ago.
Sri Lanka’s reserve, which faces a large trade deficit, fell to around $ 3 billion at the end of August 2021.