Who would carry the burden of the SWAP?

State Minister for Finance, Capital Markets, and State Enterprise Reforms Ajith Nivard Cabraal recently stated that Lankan rupee will appreciate once the inflow begins from the SWAP deals.

The State Minister was responding to a question raised by SJB MP Dr. Harsha de Silva in parliament , on SWAP arrangements.

I would like to know as to who would carry the burden of the SWAP?  Dr. de Silva asked. adding that;”I understand that there are swaps in the market. But, are these market-determined Swaps? what is the premium that one has to pay for the swap? if it is a market determine Swap, there is a premium that you need to pay for it, that is fine. Just one clarification, if the Central bank is going to take that exchange rate risk, if that is the case, then, of course, you can open the flood gate, you can bring any amount of dollars here and you can appreciate the rupee that one wishes to. but, at what cost? who is going to take the loss?”

State Minister Cabraal : Due to the Coronavirus (COVID-19) pandemic the country has been on lockdown for almost three months. We have introduced new methods to bring money into the country. The Swap arrangement has been established. Sri Lankan rupee will appreciate once the inflow of foreign exchange begins. You acknowledged that my dear friend (Dr. Harsha de Silva). this money will come and you all are frightened about that. You all are frightened that the rupee will appreciate, that the country will get back into the normal position and there will be growth and I think that will keep you all in the opposition for a long period of time. So, you are very frightened about that. I can understand your plight.

Dr. de Silva: Hon. State Minister, I’m asking you a very simple question and that is, who is taking the cost of the premium? I mean are they getting it for free? are foreigners going to be able to hedge their exchange rate risk for free or is there going to be a premium that they have to pay?

State Minister Cabraal: Now I will explain it to you, please sit down and listen, my dear friend. When you give a Swap of this nature, the money will come into the country. Are you frightened about that? Because you all are saying that there is no money coming into this country and during your period you all couldn’t get any money come into this country. There were no FDIs and there was no money coming into the country through the foreign exchange for the treasury bills and treasury bonds and that was an utter disaster. That is why the rupee, in one year depreciated by Rs.30, and who had to pay that cost?

Dr. de Silva: State Minister I’m asking you a very specific question, whether the government of Sri Lanka going to not charge a premium from the foreign investor who may invest in Sri Lanka government securities. That is the only question I’m asking. Is it for free?

State Minister Cabraal: As far as the government is concerned, the government has issued the operating instructions, please go and read it. If you read you will get all the details.

Dr. de Silva: I’m asking you a simple question if a foreigner brings more than $25 million and enters into a hedge agreement with the Central Bank of Sri Lanka or the government treasury, whether that hedge is going to carry a premium or not? That is my question?

State Minister Cabraal:  If the hedge will carry a premium or not, that operating instruction is clear so please go and read that, at the same time you can’t expect me to answer the question the way you want the answer.

 

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