COLOMBO, Sri Lanka (AP) — Sri Lanka will exchange currency with China under a 10 billion yuan (about $1.5 billion) agreement aimed at promoting trade and investment between the two countries, the island nation’s central bank said Monday.
So-called currency swaps allow central banks to ensure banks in their countries can borrow ready cash in any of the currencies involved.
China remains Sri Lanka’s largest source of imports. In 2020, imports from China amounted to US $3.6 billion, or just over 22% of Sri Lanka’s imports.
The agreement — signed between the Central Bank of Sri Lanka and the People’s Bank of China — is valid for three years.
The deal comes as Sri Lanka is undergoing a difficult time with COVID-19 dealing a severe blow to its economy, especially its $4.5 billion tourism industry. Sri Lanka also must pay nearly $4.5 billion in foreign debts annually until 2025.
China granted $90 million in October after a visit by a Chinese delegation led by Yang Jiechi, a communist party politburo member and a former foreign minister.
China considers Sri Lanka to be a critical link in its massive “Belt and Road” global infrastructure building initiative and has provided billions of dollars in loans for Sri Lankan projects over the past decade. The projects include a seaport, airport, port-city, highways and power stations.
Critics say the Chinese-funded projects are not financially viable and that Sri Lanka will face difficulties in repaying the loans.
In 2017, Sri Lanka leased a Chinese-built port near busy shipping routes to a Chinese company for 99 years to recover from the heavy burden of repaying the Chinese loan the country received to build it.
The facility is part of Beijing’s plan for a line of ports stretching from Chinese waters to the Persian Gulf. China has also agreed to provide a $989 million loan to Sri Lanka to build an expressway that will connect its tea-growing central region to the Chinese-run seaport.
China expanded its footprint in Sri Lanka during the leadership of former President Mahinda Rajapaksa, the older brother of the current leader. Mahinda Rajakapaksa is the current prime minister.
China’s economic influence over Sri Lanka has worried its closest neighbor, India, which considers the Indian Ocean region to be its strategic backyard.