India extends $900 mn aid to Sri Lanka
- India has confirmed a $400 million currency exchange with Sri Lanka, while postponing another $500 million to the Asian Clearing Union for payment (ACU).
- The swap deal was signed in order to assist Sri Lanka in overcoming a historic economic crisis.
- Sri Lanka is now experiencing a severe dollar shortage, which economists believe might lead to a default on external debt and a food scarcity in the island nation's import-dependent economy.
- Furthermore, the two countries struck a long-awaited deal a week ago to jointly construct the strategically positioned Trincomalee oil tank farm on the island's north-eastern coast.
Currency Swap Arrangement
- An agreement between two friendly countries to trade in their respective national currencies.
- Both countries pay for import and export commerce at pre-determined exchange rates, rather than bringing in third-country currency such as the US Dollar, as per the agreement.
- There is no third-country currency involved in such arrangements, therefore there is no need to be concerned about exchange rate fluctuations.
Asian Clearing Union (ACU)
- Asian Clearing Union(ACU) was established in 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP).
- Objective: To facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries.
- Members: The Central Banks and the Monetary Authorities of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are currently the members of the ACU.
- Headquarters: Tehran, Iran.