Bangladesh's balance of payments (BOP) is in stress, but the central bank is not interested at the moment in "swap funds" offered by India due to relatively high interest rates.

Swap loans make foreign currencies readily available for central banks. By definition, the purpose of the swap system is to reduce the cost of loans between central banks, so that dollars or euros are cheaper to obtain.

The arrangement meant for the Saarc countries is a measure to address short-term liquidity and BOP difficulty.

The Reserve Bank of India (RBI) has offered $2 billion to other members of the South Asian Association for Regional Co-operation.

“Return on our reserve is not more than 2 percent. But we will have to pay 3 percent interest if we take the RBI's swap fund,” a BB official told The Daily Star yesterday.

“We'll not go for this fund unless we are obligated to meet demands,” the official said.

Earlier, BB Governor Atiur Rahman at a workshop of the Economic Reporters' Forum yesterday disclosed the formation of this swap fund, first of its kind in the region.

“We will be able to take loans up to $400 million through the swap arrangement,” Rahman told reporters at the central bank.

Under the arrangement, the Saarc member countries can get the funds in dollars, euros or Indian rupees. Each instalment is of three-month tenure and can be rolled over twice. The first roll-over will be at the normal rate of interest -- LIBOR plus 2 percentage points or 200 basis points, according to the RBI.

The second tranche will be costlier by 50 basis points more than the normal interest rate.

Bangladesh's BOP, which is a summary of its economic transactions with the rest of the world, is in the negative territory indicating foreign exchange reserve outflows outstripping inflows. And, to minimise the BOP pressure, the BB has recently taken loans from the International Monetary Fund worth nearly $1 billion.

Swap arrangement between the central banks came to the surface at the Chiang Mai Initiative, a scheme drawn up by Asean, Japan, South Korea and China, following the Asian financial crisis in 1997. Under the initiative, each party to the arrangement can draw upon the financial resources of other parties in case of BOP difficulties.

Later, the concept was adopted by central banks in the US and different European countries since 2007 when the financial crisis melted them down.

The swap arrangement was first discussed at a Saarc forum several years ago. Later, the Saarc finance ministers at a meeting on global financial crisis in February 2009 noted that a major cause of the current concern in the region is the drying up of credit and the contraction of financial markets.

The issue was also discussed prominently at this year's Saarc finance ministers' meeting in Dhaka.

RBI Governor Dr D Subbarao announced formation of a $2 billion swap arrangement fund at the 24th Saarc finance governors' meeting in Pokhara, Nepal last week.

The facility will be available in three instalments.

“India has set the interest rates for the fund as it has provided the entire fund,” said the BB official, pointing at a higher interest rate.

However, he said the fund is less costly than loans, such as Islamic Development Bank that charges a 5 percent interest rate.

RBI said, to take the fund, the central banks of the requesting countries will need to enter into bilateral swap agreements, which need final approval from the Indian government.

The RBI's proposal to offer swap facility to the Saarc member countries had earlier been approved by the Union Cabinet.

The Daily Star/ Bangladesh/ 21-May-2012