BoL makes RMB 6 billion drawdown under currency swap agreement with PBOC in 2023 (Linked to Record ID#92673, 102283, 95318)

📋 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 be 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. Lack of detail on the activities for which drawdowns under the swap line can be used means it is unclear if the $300 million drawdown should be considered gross foreign reserves or public or publicly guaranteed (PPG) debt by Laos. If the $300 million (gross) drawdown is to be used for balance of payments support; shoring up gross reserves; and/or if the (gross) drawdown has conditions, restrictions, or is otherwise not fully controlled by BoL, then the drawdown should be classified as part of Laos' PPG debt stock (rather than gross foreign reserves), per World Bank and IMF reporting guidelines. However, the World Bank and IMF indicate BoL is reporting the (gross) drawdown as foreign reserves, instead of debt. More information can be found in the IMF's May 2023 Article IV report (see p. 4, 40-41, https://www.imf.org/en/Publications/CR/Issues/2023/05/22/Lao-People-s-Democratic-Republic-2023-Article-IV-Consultation-Press-Release-Staff-Report-533636) and a World Bank 2023 report on Laos' Macroeconomic Performance (See p. 13, 19, https://thedocs.worldbank.org/en/doc/fd7f79460aa965e5f4c4c5577e0ea649-0070062023/related/PFR-1-Macroeconomic-Performance.pdf).
4. According to the World Bank’s November 2023 Lao PDR Economic Monitor, 'Public and publicly guaranteed (PPG) debt remains at critical levels, undermining macroeconomic stability and development prospects. Laos is facing both solvency and liquidity challenges due to significant financing needs, limited financing options, low foreign exchange reserves, and considerable depreciation pressures. The PPG debt stock was estimated at 112 percent of GDP at the end of 2022. If domestic expenditure arrears and a currency swap [with PBoC] are included, the PPG debt stock increases to about 125 percent of GDP.' See https://documents1.worldbank.org/curated/en/099120423041040145/pdf/P1796280aeb3e10520909c04119b3a755d0.pdf (p. 24).
5. Some sources suggest that the PBOC extended its currency swap arrangement with the BoL in 2020 on condition that the funds be used to facilitate imports of goods from China as opposed to paying down public debt.
6. 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.
7. 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.
8. Evidence of the BoL’s RMB 6 billion ($900 million) drawdown (borrowing) in 2023 through its PBOC swap facility is provided via https://www.adb.org/sites/default/files/linked-documents/cps-lao-2024-2028-isga.pdf and and https://thedocs.worldbank.org/en/doc/5c2594a0cc6846465fe3bafda50ad993-0070062024/original/WB-LaoEconomicMonitorApril20-24web.pdf

📚 Sources & References

• LAO PDR ECONOMIC MONITOR
• Official Reserves Lao PDR, 2023 RMB Internationalization Report
• Central Bank Survey Lao PDR
• Lao PDR 2023 -- Macroeconomic Performance
• IMF Country Report No. 23/171 LAO PEOPLE’S DEMOCRATIC REPUBLIC 2023 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR LAO PDR
• April 2024 LAO PDR ECONOMIC MONITOR
• Lao People's Democratic Republic Country Partnership Strategy (2024–2028) 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.