Govt may try new currency swap to help developing economies avert default

To help economies facing the risk of debt default, India could try an innovative method of currency swap backed by trade in mineral resources.

“Given the currency fluctuations, it will be crucial for the Global South to enter into currency swap agreements and link them to projects and trade in minerals and other commodities,” said Dammu Ravi, Secretary (Economic Relations), Ministry of External Affairs at an event in New Delhi. A currency swap between two cross-border entities allows them to procure loans in foreign currency at more favourable interest rates than might be available when they borrow directly in a foreign market.

Access to critical minerals from abroad has become essential for India to build up its semiconductor chip industry and expand renewable energy to push growth.

India has already extended the term of a $400 million currency swap facility with Sri Lanka this year. Currency swaps have become a much sought-after facility for extending support to developing countries hamstrung with low foreign exchange reserves. Since 2018, India has in principle agreed to have swaps with 23 nations. To formalise it, the union cabinet has also approved an amended “Framework on Currency Swap Arrangement for SAARC Member Countries”, which came into force in 2019. The Framework includes a standby swap of $400 million, within an overall size of the facility of $2 billion.

The secretary’s comments at the inaugural session of “Towards Indian G20 Presidency: Delhi Process VI”, organised by RIS, which specialises in global trade issues, are significant. It could offer a fresh look at these cross-country arrangements. While developing countries need the support, they are progressively more leery of countries like China, which has been quite liberal in having swap arrangements. India, by contrast, has the restriction of a limited balance sheet. A counterpart offer of mineral trade with these countries will offer some leeway. It will give the recipient countries room to expand their trade network, and will also allow India the option to draw upon scarce mineral resources from abroad with transparent pricing.

Sachin Chaturvedi, director general, RIS, and a member of the central board of RBI, said this approach could be considered by the central bank.

He also said Ravi’s comments sit well with Prime Minister Modi’s urging of triangular cooperation to tackle the global challenges of inflation and building up supply chain resilience.

An IMF paper last year noted that the global current swap network had reached 91 lines by 2020-end. The US Fed has extended support under it to nine developed and emerging market economies, followed by China. “China also started to expand its (swap) network in a bid to promote internationalisation of the renminbi and to facilitate trade and investment”, the paper noted.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

supply hyperlink

What do you think?

Written by admin

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

Australia vs Zimbabwe: Glenn Maxwell’s Rapid 32 Sees Hosts To 5-Wicket Win In 1st ODI

Sectors, states’ efforts needed to get 500 GW renewable capacity: Khuba