The Bangladesh Bank has extended validity of the credit facility it extended to Sri Lanka by three months after the expiry of the first three-month tenure of the credit facility, foreign media reported.

The loan facility has been renewed following a request from the island nation, a senior official of the central bank told ‘New Age’ on Sunday.

Bangladesh extended the credit facility amounting to USD 200 million under a currency swap deal with Sri Lanka.

The island nation received the loan facility from Bangladesh in three tranches.

The BB released USD 50 million as the first tranche under a currency swap deal to support poorly-rated Sri Lanka on August 19, 2021.

The second tranche amounting to USD 100 million was released on August 30, 2021 and the final instalment worth USD 50 million was released on September 21, 2021.

As per the agreement, Bangladesh would receive 2 per cent plus LIBOR as interest on the credit amount.

If the instalment principal remains unpaid even after six months, the applicable interest would be 2.5 per cent plus LIBOR.

‘Our assessment is that the Sri Lanka would use the fund for at least nine months,’ the BB official said.

The impact of the COVID outbreak has been devastating on the island nation’s economy which contracted by 3.4 per cent in 2020.

Tourism, a major source of Sri Lanka’s foreign currency, has been the worst affected sector as the COVID situation is yet to come under control.

Economic crisis coupled with a poor reserve amounting to less than two months’ import payments also prompted credit rating agencies to downgrade the country’s rating and to question whether Sri Lanka would be able to service the USD 1.5 billion line of debt that matures in 2022.

The currency swap initiative was taken after Sri Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh to join the celebrations of the golden jubilee of Bangladesh’s independence and received the BB’s approval in May.

Apart from receiving USD 200 million from Bangladesh, the island nation also received another USD 787 million from the International Monetary Fund’s special drawing rights (SDR) allocation.

Apart from the fresh phase of the crisis, Sri Lanka has had no default events (on bonds or loans) since 1983.

On the other hand, Bangladesh’s reserve was on the rise after the COVID outbreak whereas Sri Lanka’s reserve came under increasing pressure.

Foreign tourists were staying away after deadly suicide bombings took place in Sri Lanka on Easter Day in 2019, killing more than 250 people. But efforts to revive the industry failed after the pandemic struck.

On Tuesday, Bangladesh’s foreign exchange reserve stood at USD 46.3 billion after hitting a record high of USD 48 billion from around USD 33 billion one and a half year ago.

The reserve of Sri Lanka, which is facing a sharp trade deficit, declined to around $3 billion by the end of August 2021.

-Agencies