CBSL makes RMB 10 billion drawdown -- via rollover mechanism -- under currency swap agreement with PBOC in 2022

📋 Staff Comments

1. A bilateral currency swap (BCS) agreement — also known as a central bank liquidity swap agreement — is an agreement between the central banks of two countries to exchange cash flows in different currencies at predetermined rates over a specified period of time. Central banks participate in these agreements to facilitate bilateral trade settlements using their national currencies (rather than relying upon on a third-party currency such as the U.S. dollar), manage demands from their local banks, and provide liquidity support to financial markets. The party that draws down on the swap line becomes the borrower and the other party becomes lender. During the term of the swap, the party that draws down on the swap line makes either fixed or floating interest payments on the principal amount. If both parties draw down on the swap line, then both parties exchange fixed or floating interest payments on the principal amounts. The 5-step process of drawing upon a currency swap line with the People’s Bank of China (PBOC) can described from the perspective of an importer in a given country (‘Country X’) seeking to settle trade with a Chinese firm in RMB. Step 1: The central bank of Country X and the PBOC activate their currency swap in advance, at which point each party deposits a specific amount of its currency in an account controlled by the other party (i.e. the central bank of Country X deposits local currency in an account controlled by the PBOC, and the PBOC deposits an equivalent amount in RMB in an account controlled by the central bank of Country X). Step 2: A firm in Country X that imports goods from China applies for an RMB-denominated loan from a domestic bank. Step 3: The domestic bank in Country X that receives the loan application then applies to its central bank for an RMB-denominated loan. After a review process, the central bank of Country X notifies the domestic bank applicant that its loan application was approved. The central bank of Country X subsequently requests that the PBOC transfer RMB funds from the central bank of Country X’s swap account within the PBOC to the loan applicant’s account with a corresponding bank in China. Step 4: The domestic bank in Country X directs the corresponding bank in China to transfer RMB funds into a Chinese exporter’s account, and the corresponding bank in China provides RMB funds to the Chinese exporter. Step 5: The importer in Country X repays the RMB-denominated loan at its maturity date. The domestic bank notifies the central bank of Country X of the repayment, and transfers RMB into the central bank’s account within the PBOC through the corresponding bank in China. For the central bank of Country X, the RMB deposit is an asset that should be recorded on its balance sheet as an official reserve asset denominated in RMB. The contra entry of this asset is the liability in the local currency of Country X that represents China’s claims in the central bank of Country X. This should be also recorded on the balance sheet of the central bank of Country X. At the time of the exchange of currencies, it should be recorded as an increase in assets and an increase in liabilities of the monetary authorities in the balance of payments. The reason why the PBOC uses this mechanism to provide renminbi liquidity to other central bank is to increase the speed, convenience, and volume of transactions between the two countries. More detailed information about currency swaps with the PBOC can be found at https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021210-print-pdf.ashx and https://thechinaguys.com/the-rise-of-the-renminbi-the-reality-of-bilateral-swap-agreements/ and https://www.imf.org/external/pubs/ft/bop/2017/pdf/17-25a.pdf.
2. AidData treats drawdowns under BCS agreements with the PBOC as collateralized loans because, in a BCS arrangement, the currency of the borrower is held as collateral while the lender receives interest on the amount drawn down by the borrower until repayment is made.
3. Multiple sources indicate that the entire RMB 10 billion ($1.5 billion) currency swap facility was utilized by the CBSL (see https://www.economist.com/asia/2022/01/13/sri-lanka-is-flirting-with-default and https://economynext.com/chinas-10bn-yuan-swap-with-sri-lanka-is-unique-says-envoy-89460/ and https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/Full_Text_Volume_I.pdf and https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/Full_Text_Volume_II.pdf). Volume II of CBSL's 2022 Annual Report confirms that the RMB 10 billion was rolled over in 2022 (see https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2022/en/Full_Text_Volume_II.pdf)4. Volume 1 of CBSL’s 2021 annual report (https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/Full_Text_Volume_I.pdf) notes that '[a]midst significant debt servicing obligations falling due during the year, the Government and the Central Bank received some inflows that enabled replenishment of the GOR to a certain extent. These included the Special Drawing Rights (SDR) allocation by the IMF, two foreign currency term financing facilities from the China Development Bank, and international currency swap agreements with the People’s Bank of China (PBOC) and the Bangladesh Bank.” And “the Central Bank’s currency and deposits liability position increased by end 2021, as a combined effect of entering into new bilateral currency swap arrangements with PBOC amounting to CNY 10 billion (equivalent to around US dollars 1.5 billion) and the Bangladesh Bank (US dollars 200 million) and the settlement of the SAARCFINANCE swap facility with the RBI (US dollars 400 million) during the year.' Volume 2 of CBSL's 2021 annual report (see https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/Full_Text_Volume_II.pdf ) notes that '[t]he cash balance available for restricted use represents the CNY 10 billion received under the bilateral currency swap agreement between CBSL and the PBoC as explained in Note 25.6' and '[u]nder this agreement, in December 2021, CNY 10 billion (equivalent to USD 1.5 billion) was received from the PBoC, which can be utilized for restricted use (Note 8.1) in exchange of an equivalent amount of LKR for a period of one year. Outstanding balance as of 31 December 2021 represents CNY 10 billion swap in December 2021 for a period of one year, and the first roll-over is due in December 2022, subject to the mutual consent of the PBoC and the CBSL.'5. Multiple CBSL press releases suggest that CBSL was hoping to use the PBOC swap drawdown (and the receipt of a CDB balance of payments loan) to influence the credit rating agencies. See https://www.cbsl.gov.lk/en/news/government-strongly-disputes-hurried-rating-action-by-fitch-ratings and https://www.cbsl.gov.lk/en/news/ill-timed-and-unacceptable-rating-action-by-moody-s-renews-concerns-of-subjectivity6. The PBOC swap agreement specifies that '[t]he amount received under this agreement can be used to finance trade and direct investment between the two countries and for other purposes agreed upon by both parties.' See https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2021/en/Full_Text_Volume_II.pdf and https://www.cbsl.gov.lk/en/node/9944 and https://www.dropbox.com/s/we3udfa91iamdih/%241.5%20bn%20Chinese%20swap%20came%20with%20impractical%20conditions%20-%20The%20Morning%20-%20Sri%20Lanka%20News.pdf?dl=0 and https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2022/en/Full_Text_Volume_II.pdf7. Most central banks publish their end-of-year outstanding PBOC swap debt, but only a few report detailed transaction-level data on drawdowns during the year. Therefore, if no information on drawings is available, AidData assumes that total drawdowns during the reporting period equal the amount outstanding at the end of the reporting period (and vice versa). Since the (de jure) maturities of PBOC swap drawings are 12 months or less, this creates a lower bound estimate for actual drawdowns under the PBOC swap line.
4. PBOC swap debt is frequently rolled over. In central bank reports where one can only observe the year-end outstanding amount, no distinction between rollovers and drawdowns is possible. In these cases, one can derive (new) drawdowns as the difference between the current and last year’s outstanding swap debt stock. This measure essentially captures net lending through the PBOC swap line.
5. In 2023, the IMF confirmed that the PBOC swap proceeds only become by the CBSL 'usable once [gross international reserves] rise above 3 months of previous year's import cover.' See https://www.imf.org/en/News/Articles/2023/12/12/pr23439-sri-lanka-imf-executive-board-completes-first-review-under-eff-arrangement

📚 Sources & References

• ANNUAL REPORT (Volume II) FOR THE YEAR 2022
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• Sri Lanka boosts FX reserves with lift from Chinese swap
• Foreign reserve rise assisted by Chinese currency swap agreement
• Forex Crisis: Sri Lanka to Obtain US$ 300M Term Loan from Bank of China
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• MID - YEAR FISCAL POSITION REPORT - 2021
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• Remaining $ 200 m swap from China next month
• Pending Chinese loan expanded to $ 350 m AUGUST 8, 2021
• The Central Bank of Sri Lanka enters into a Bilateral Currency Swap Agreement with the People’s Bank of China
• External Sector Performance – April 2021
• Sri Lanka Asks China for Debt Restructuring During Wang Visit
• Top China Diplomat to Visit Sri Lanka as Forex Crisis Deepens
• China’s Lending Comes Under Fire as Sri Lankan Debt Crisis Deepens
• Correction: Fitch Downgrades Sri Lanka's Long-Term Foreign-Currency IDR to 'CC'
• China’s 10bn yuan swap with Sri Lanka is “unique”, says envoy
• Sri Lanka notes importance of US$ 1.5 billion currency swap with China
• Central Bank enters into a Swap Agreement with People’s Bank of China
• Sri Lanka is flirting with default
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• Monetary Policy Review: No. 0 5 - July 202 2 The Central Bank of Sri Lanka further tig h tens its Monetary Policy Stance
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• The Central Bank of Sri Lanka maintains policy interest rates at their current levels, $1.5 bn Chinese swap came with impractical conditions
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• ECONOMIC
• PRICE AND FINANCIAL SYSTEM STABILITY
• OUTLOOK AND POLICIES
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• Public Debt Summary - As at End 2022 Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.