This is the first time Bangladesh is giving loans to another country from the reserves by swapping currency.
Analysts see no risk in the process, but warned it may get difficult to get back the money some times.
Serajul Islam, a spokesman for the Bangladesh Bank, said on Tuesday that it approved the decision in principle to help the South Asian neighbour whose foreign exchange reserves are dwindling.
Bangladesh will provide Sri Lanka with $200 million to $250 million under the deal following the island nation’s request.
Sri Lanka will repay over three months with 2 percent interest on the Libor rate, according to Serajul.
Sri Lanka’s foreign currency reserves stand around $4 billion, or 4.76 percent of the GDP of $84 billion.
Bangladesh’s reserves are nearly 12 percent of the GDP.
According to international standards, a country should have enough reserves to pay import bills for three months.
Under the deal, Sri Lanka will need to deposit Sri Lankan rupees worth the amount it wants from Bangladesh. The Sri Lankan government and the central bank will be guarantors.
Researcher Ahsan H Mansur said the deal will brighten Bangladesh’s image, but sometimes problems arise in getting the money back .
Former Bangladesh Bank governor Atiur Rahman said the risks of currency swap are very low.
Even if Sri Lanka fails to repay, he said, the two countries can adjust the amount in their trade.
It will also help Bangladesh gain points in credit ratings, according to Atiur.