Sri Lanka And China Entered Into A Currency Swap Agreement

By Hema Senanayake - September 20, 2014

Hema Senanayake

In early 1950s Sri Lanka was administered under a UNP government. In December of 1952, Sri Lanka and China signed the “Rubber-Rice Pact.” Anybody can easily understand the mechanics of the Pact; Sri Lanka exports Rubber to China and Imports Rice, it is simple and clear.

Sri Lanka is now ruled by the UPFA government. On 16th of September, 2014, i.e. a few days ago, Sri Lanka signed another landmark agreement with China; it is a Currency Swap Agreement. What is this? Unlike the Rubber-Rice Pact, most of us do not understand what this agreement is about. I wanted to write and explain the mechanics of the currency swap and its effects on Sri Lanka, so I tried to find out the specific terms of the agreement. I failed, because in the official website of the Central Bank of Sri Lanka, I did not find any information about it. Then I searched the website of the Chinese Central Bank which is known as People’s Bank of China (PBC). In PBC website, I found only the following:

“PBC Signed Local Currency Swap Agreement with Central Bank of Sri Lanka. With the approval of the State Council, the People’s Bank of China signed, on September 16, 2014, an agreement on bilateral local currency swap with the Central Bank of Sri Lanka. The size of the swap facility is 10 billion yuan/LKR 225 billion. The term of the agreement is three years and can be extended with mutual consent. The signing of the local currency swap agreement will help promote bilateral trade and investment and strengthen financial cooperation between the two central banks.” (LKR means Sri Lanka Rupee, yuan is Chinese National Currency i.e. CNY)

Since the terms of the agreement are not known to me, I will be able to explain the most general effects of the agreement. Firstly, I like this agreement, it is a historical need of China and the world trade and Sri Lanka cannot avoid it but must be careful.                        Read More