India: SAARC Swap Framework, 2012

The RBI launched the SAARC swap framework to “[strengthen] regional financial and economic cooperation” and to provide to SAARC countries a “backstop line of funding . . . to meet any balance of payments and liquidity crises” (RBI 2012). The facility was made available to all SAARC member countries: Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka (RBI 2012).

The member countries had to each approach the RBI to use the swap facility and enter into a bilateral swap agreement, which would incorporate the terms of the framework (RBI 2012). Specific terms of the SAARC swap agreement, such as maturity, draws, and rates, were stated in the 2012 framework and did not have to be renegotiated by borrowing central banks in each bilateral agreement. The main decision to be made with each agreement was the maximum size of the swap facility. The original swap framework was established for a three-year term, before receiving extensions in 2016 and 2019.

The Indian government provided additional financial support to Bhutan and Sri Lanka that was not part of the SAARC framework. These facilities were designed to provide Indian rupee liquidity, meet balance of payments (BoP) needs, and strengthen food and energy security.

The RBI also extended special bilateral swap lines to Sri Lanka that exceeded the limits under the SAARC framework. The CBSL had to supplement their SAARC swaps with special swap lines for USD 700 million in 2015 and 2016 (see Figure 2) (RBI 2015b; RBI 2016c). In 2019, the CBSL also requested an additional USD 1 billion swap line from the RBI, which was “under consideration” (CBSL 2019a). As of 2020, CBSL was continuing negotiations with the RBI to secure a special bilateral swap line for an additional USD 1.0 billion  (CBSL 2020).

Sources: GoI 2022c; RMA 2014; RMA 2022; GoI 2022a; RBI 2015b; CBSL 2015; RBI 2016c.

Both Sri Lanka and Maldives obtained aid from the IMF, while Bhutan did not. On September 1, 2022, the IMF reached an agreement with Sri Lanka to provide USD 2.9 billion via an Extended Fund Facility (EFF) and to stabilize the country’s economy and create grounds for a sustainable economic recovery through a 48-month process (IMF 2022b). Maldives received USD 28.9 million on April 24, 2020, under the IMF’s Rapid Credit Facility. Maldives also received SDR 20.3 million as part of the IMF’s general allocation for 2021 to help countries deal with the COVID-19 pandemic (MMA 2022).

India’s central bank acted under the Reserve Bank of India Act, 1934, and we found no evidence that the SAARC swap framework required further legislation (GoI 1934; RBI 2021a). India’s Union Cabinet approved the RBI’s decision to offer the swap framework and all subsequent extensions and amendments^FUnion Cabinet represents the council of ministers headed by the prime minister to aid India’s president in exercising its duties (GoI 2022b). (RBI 2012).  

The Royal Monetary Authority of Bhutan (RMA) had the ability to set a fixed exchange rate and manage the external reserves of the Royal Government of Bhutan as per the Royal Monetary Authority Act of Bhutan, 2010 (GoB 2010). The CBSL is instituted by the Monetary Law Act No. 58 (1949) of Sri Lanka (CBSL 2022; SL 1949). The MMA functions as the central bank of Maldives as per Law no. 6/81 Maldives Monetary Authority Act 1981 (GoM 1981; MMA 2022). 

The “Framework on Currency Swap Arrangement for SAARC Member Countries” was extended solely by the RBI, which is the sole lender under the framework. There was no institutional governing body under the SAARC 2012 framework (Mühlich and Fritz 2021).

Under the framework, the RBI entered into bilateral agreements with any requesting SAARC central bank, subject to final approval by the government of India. Each agreement is broadly based on the original 2012 SAARC framework, but further modifications to tenures and size limits have been agreed to in future renewals of bilateral agreements by the signing parties. Extensions and amendments to the SAARC framework and individual bilateral agreements had to be approved by the government of India (RBI 2012). Our understanding is that the RBI reserved the right to approve individual draws once the bilateral agreement had been signed.

The RBI disclosed the use of each swap line in its annual report under the Foreign Exchange Reserves section. Swaps were disclosed separately from official reserve estimates (see Figure 1).

Sri Lanka’s 2020 swap agreement was recommended by the Monetary Board of the CBSL and approved by Sri Lanka’s Cabinet of Ministers (CBSL 2020). The RBI and CBSL’s swap line signed in July 2020 was disclosed by both central banks via press releases on their respective websites (CBSL 2020; RBI 2020a). The CBSL’s Economic Research Department (ESD) is the main contact for dealing with multilateral organizations like the SAARCFINANCE^FNetwork of central bank governors of the SAARC region, instituted on September 9, 1998 (RBI 2021). group and the IMF (CBSL 2019b).

The RMA reported on the use of the swap line with the RBI under the SAARC framework in its annual reports (RMA 2016). The RBI’s decision to provide an additional currency swap of USD 200 million to Bhutan in November 2022 was disclosed as a press release by the Embassy of India, Thimphu (GoI 2022a).

The CBSL also used its annual report to disclose the initiation, use, and repayment of its swap lines with the RBI (CBSL 2016; CBSL 2017a; CBSL 2021a). The MMA reported in its annual report on the details of its swap line with the RBI (MMA 2022).

Bhutan and Sri Lanka’s use of the 2012 SAARC framework to sign and use a bilateral swap line with India in 2022 was disclosed by the RBI in its half-yearly report on FX reserve management (RBI 2022c).

It is not clear which body at the RBI made decisions on day-to-day operations of the swap. The borrowing central bank was required to approach the RBI to access and activate the facility (RBI 2012). Each draw of the swap line has been presented as part of the RBI’s balance sheet in foreign exchange reserve.

The RBI released the original swap framework from 2012, and the extensions in 2016 and 2019, via press releases on its website (RBI 2012; RBI 2016a; RBI 2019a). As per the original framework in 2012, the RBI intended to provide a backstop line of funding to all SAARC member nations to help meet balance of payments need and address liquidity crises (RBI 2012). In 2016, the RBI extended the tenure of the swap framework, while mentioning the need to further financial stability and economic cooperation in the region (RBI 2016a). In 2019, the RBI’s revised swap framework referred to the need for swap facilities during specific foreign exchange liquidity crises in member nations and as a broader step to help financial stability in South Asia (RBI 2019a).

The RBI said that its swap agreements with Sri Lanka in 2015 and 2016 were intended to strengthen economic cooperation and improve bilateral ties (RBI 2015a; RBI 2015b; RBI 2016c). In 2016, RBI Governor Raghuram Rajan confirmed in his speech to the SAARCCFINANCE group that the swap facility had helped member countries alleviate short-term foreign exchange requirements (Statesman 2016). In 2020, the RBI said that it was trying to provide a backstop line of funding to borrowing central banks to help meet dollar liquidity needs in the face of declining tourism receipts and other COVID-19 related disruptions to the economy (RBI 2021a).

The RBI made swaps under the 2012 SAARC framework available to all other SAARC member countries—Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka (RBI 2012). The member countries each had to approach the RBI to use the facility and enter into bilateral swap agreements (RBI 2012). As of February 28, 2022, three countries—Bhutan, Maldives, and Sri Lanka—had done so.

The maximum amount that India made available under the SAARC swap framework was USD 2 billion. The swap amount available to each participating country was predetermined by the agreement. It was “broadly based” on two months of the country’s import cover and was set to a minimum of USD 100 million and a maximum of USD 400 million per country (RBI 2012). The RBI did not disclose the amount it was willing to make available to each SAARC member country. As of December 20, 2018, the RBI incorporated a Standby Swap Arrangement (SSA) into the original swap framework. This allowed individual SAARC member countries to draw an additional USD 400 million beyond their originally specified limit to take advantage of the unutilized balances of the facility (RBI 2020b).

On January 31, 2020, the RMA and RBI signed an agreement for USD 200 million under the SAARC framework (RBI 2020b; RMA 2020). In November 2022, as per the request of the Royal Government of Bhutan, the GoI provided an additional USD 200 million swap line and extended the validity of the agreement to June 30, 2023 (GoI 2022a). As per Figure 1, the size of Bhutan’s swap line with the RBI increased from USD 100 million in 2016 to USD 400 million in 2022.

The MMA borrowed the maximum permissible amount of USD 400 million from the RBI under the SAARC swap arrangement and repaid it fully by December 2021 (MMA 2022). 

An eligible central bank would have to approach the RBI to set up a bilateral agreement, which would need final approval from the Government of India. As per the 2012 framework, each requesting member country could draw dollars, euros, or Indian rupees in multiple tranches. The foreign exchange liquidity would be provided to the borrowing central bank against collateral of their domestic currency or domestic currency-denominated government securities (RBI 2012).

Each swap draw could be rolled over twice on the request of the borrowing member country (RBI 2012). The RBI provided concessions under the SAARC framework relating to the waiting period and the second rollover to incentivize draws in Indian rupees (RBI 2020b).  

The RBI imposed no restrictions on the downstream use of funds by borrowing central banks. The RMA entered into the 2013 and 2016 swaps to better manage its Indian rupee reserves, to provide relief for short-term balance of payment transactions, and to help with a backstop line of funding for liquidity mismatches (RMA 2014a; RMA 2016).

The RBI’s swap facility helped Sri Lanka stabilize its exchange rate and strengthen its position in the financial markets (CBSL 2017a). The CBSL’s downstream swap programs with commercial banks helped moderate the decline in market liquidity in 2016 (CBSL 2017b). As a response to the COVID-19 crisis, the CBSL’s swap line with the RBI was intended to “maintain sufficient short-term FX liquidity” without adversely affecting the country’s foreign exchange reserves as a result of the COVID-19 pandemic (CBSL 2020). In 2020, the CBSL also entered into foreign exchange swap agreements with licensed domestic banks to address foreign exchange liquidity shortages in the market (CBSL 2021a).

The Maldives central bank has a mandate to keep its currency in a +/-20% band of MVR 12.85 per US dollar. The MMA continued to intervene in the foreign exchange market to maintain exchange rate stability. The MMA was providing foreign exchange liquidity to the markets in the first three quarters of 2021 to help with US dollar shortages in the economy (MMA 2022). In 2022, the MMA also used its swap line to provide a backstop line of funding for meeting short-term foreign exchange liquidity requirements (RBI 2022a).

Each swap draw was for a tenure of three months and could be rolled over twice for a maximum tenure of nine months (RBI 2012).

The interest rate charged under the SAARC framework would be three-month LIBOR plus 200 basis points for dollar and euro swaps, and the RBI Repo rate minus 200 basis points for Indian rupee swaps. The second rollover of any draw under a SAARC swap agreement would incur a 50-basis-point premium to the previously charged interest rate (RBI 2012).

The RMA’s non-SAARC swap agreement with the RBI in March 2013 charged an interest rate of 5.5% (RMA 2013). There was no other disclosure of fees or exchange rates in the swap agreements.

The RBI’s original swap framework did not specify an exact expiration date but limited the maximum maturity of each swap draw to three months with a limit of two rollovers. The maturity of individual swap lines would be negotiated bilaterally between the RBI and borrowing central bank (RBI 2012).

Each central bank’s borrowing limit was broadly based on two months’ import cover of their respective countries and was limited to a range of USD 100 million–USD 400 million (RBI 2012). The CBSL signed a special swap agreement with the RBI to borrow an additional USD 700 million beyond the SAARC facility (RBI 2015b; RBI 2016c).

There were no restrictions imposed by the RBI on the downstream use of funds by borrowing central banks.

Research did not identify if the RBI considered any other types of support for its USD 2 billion contribution to the SAARC swap framework. The RBI and Indian government provided other non-SAARC swap aid to member countries to address foreign exchange shortages (Figures 4 and 7 in the Appendix). In December 2018, India also provided Maldives with an assistance package of USD 1 billion (USD 200 million in budget support and USD 800 million credit facility by the India EXIM bank) (GoM 2018).

The RBI first offered the swap to SAARC nations on November 15, 2012. In 2016, RBI extended to November 15, 2017 (RBI 2016a). In 2019, the framework was implemented for a further three years to November 13, 2022 (RBI 2019a).

In April 2022, the RBI extended the duration of their swap line with the CBSL and converted it into a standing agreement^FOn April 22, 2022, the official Twitter handle of the High Commission of India in Colombo, Sri Lanka, confirmed that India’s swap line for USD 400 million to the CBSL was set to expire in January 2022 and has been “extended indefinitely” (GoI 2022d).. In November 2022, in response to the Royal Government of Bhutan, the GoI extended their bilateral swap agreement to June 30, 2023 (GoI 2022a). India also agreed to a swap line with Maldives in December 2022 based on the SAARC 2012 framework, which leads us to assume that the swap agreement is still active (RBI 2022a).