TAG: GS-2: IR & GS-3: ECONOMY
THE CONTEXT:
The Reserve Bank of India (RBI) has announced a Currency Swap Agreement with the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework 2024-27.
EXPLANATION:
What is the Currency Swap Arrangement?
- The word swap means exchange, i.e. a currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
- Central banks and Governments engage in currency swaps with foreign counterparts to meet short-term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
- These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
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- Exchange rate risk, known as currency risk, is the financial risk arising from fluctuations in the value of a base currency against a foreign currency in which a company or individual has assets or obligations.
Why did India provide financial assistance to the Maldives?
- The Maldives is located in a strategically crucial position in the Indian Ocean. This region is essential for India’s maritime security and trade routes. India’s financial assistance helps strengthen ties with the Maldives, ensuring that the island nation remains aligned with India’s security interests.
- India’s financial assistance to the Maldives aligns with its Neighborhood First Policy, which aims to prioritize the economic and security interests of its immediate neighbors. Supporting the Maldives financially ensures close and stable relations between the two nations.
- India and the Maldives share strong cultural, historical, and people-to-people ties. India’s financial assistance helps reinforce these connections, demonstrating India’s commitment to the well-being and development of its neighbor.
- India has provided financial aid to counter the growing influence of external powers like China. China’s Belt and Road Initiative (BRI) has led to significant investments in the Maldives, raising concerns in India over potential Chinese strategic control. By providing assistance, India aims to balance China’s growing presence in the region.
India’s Financial Support to Maldives:
- India will extend financial support to the Maldives, providing $400 million under the US Dollar/Euro Swap Window.
- Additionally, ₹30 billion (approximately $357 million) will be made available under the INR Swap Window.
- The Currency Swap Agreement will remain valid until June 18, 2027.
What is the debt situation of Maldives?
- The Maldives’ debt is now estimated at 110% of its gross domestic product (GDP), with increasing risks of defaulting on its sukuk (Islamic bond).
- A failure to make payments would mark the world’s first default of an Islamic bond.
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- Fitch Ratings estimates that the Maldives’ external debt obligations will reach $557 million by 2025 and exceed $1 billion by 2026.
- The country’s foreign reserves stood at just $437 million at the end of August, only enough to cover one-and-a-half months of imports.
- India provided a $50 million lifeline to the Maldives to help avoid this outcome.
- The Export-Import Bank of India is owed nearly $400 million, while the Export-Import Bank of China is owed about $530 million as of last year.
Significance of CSAs India’s Assistance:
- Debt Relief: India’s financial aid, including a $50 million lifeline, would help the Maldives avoid debt default and stabilize its economy.
- Geopolitical Influence: With this, India can counter China’s influence in the Maldives, strengthening its strategic position in the Indian Ocean.
- Diplomatic Reset: India’s support strengthens diplomatic relations, aiding the Maldives in debt restructuring and global partnerships.
- Helps maintain financial stability during a crisis by providing a backstop line of funding for forex liquidity requirements.
- Helps in addressing short-term balance of payments stress.
Other Significant CSA of India:
- BRICS Contingent Reserve Agreement signed in 2015.
- India-Japan bilateral CSA amounting to $75 billion.
- Others: India-UAE CSA, India-Sri Lanka CSA, etc.
Additional information
What is South Asian Association for Regional Cooperation (SAARC)?
- It was established by signing the SAARC Charter in Dhaka (Bangladesh) on 8th December 1985.
o Objective: To promote the welfare of the people of South Asia and to improve their quality of life, and accelerate economic growth, among other things.
- Member: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
- Secretariat: Kathmandu (Nepal)
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