China Eximbank provides RMB 440 million government concessional loan for Nuku'alofa Central Business District (CBD) Reconstruction Project (Linked to Record ID#64926, #73428)

Project narrative

After riots and fires in November 2006, the Central Business District (CBD) of the city of Nuku'alofa experienced significant damage. Up to 80% of the CBD was destroyed. In response to these riots on November 19, 2007, China Eximbank and the Government of Tonga signed an RMB 440 million (TOP 118,624,000) government concessional loan (GCL) agreement for the Nuku'alofa Central Business District (CBD) Reconstruction Project. The loan carried the following borrowing terms: an interest rate of 2%, a grace period of 5.8333 years, a maturity of 20.8333 years, a management fee of 1%, and a commitment fee of 0.75%. The borrower was expected to use the loan proceeds to finance a November 19, 2007 commercial contract with China Civil Engineering Construction Corporation (CCECC). The loan fully disbursed between the Government of Tonga’s 2009 fiscal year and 2012 fiscal year. The loan's amount outstanding was TOP 0 as of June 30, 2008, TOP 41,517,264 as of June 30, 2009, TOP 52,661,153 as of June 30, 2010, TOP 92,473,011 as of June 30, 2011, TOP 121,264,000 as of June 30, 2012, TOP 130,460,000 as of June 30, 2013, TOP 149,420,000 as of June 30, 2015, TOP 146,344,000 as of June 30, 2016, TOP 142,032,000 as of June 30, 2017, TOP 153,780,000 as of June 30, 2018, TOP 146,540,952 as of June 30, 2019, TOP 147,714,286 as of June 30, 2020, and TOP 144,906,667 as of June 30, 2021. The borrower made a TOP 1,424,115 repayment (TOP 1,424,115 in interest and TOP 0 in principal) between July 1, 2009 and June 30, 2010, a TOP 1,840,052 repayment (TOP 1,840,052 in interest and TOP 0 in principal) between July 1, 2010 and June 30, 2011, a TOP 2,169,710 repayment (TOP 2,169,710 in interest and TOP 0 in principal) between July 1, 2011 and June 30, 2012, a TOP 2,449,615 repayment (TOP 2,449,615 in interest and TOP 0 in principal) between July 1, 2012 and June 30, 2013, an unknown repayment between July 1, 2013 and June 30, 2014, an unknown repayment between July 1, 2014 and June 30, 2015, a TOP 3,115,996 repayment (TOP 3,115,996 in interest and TOP 0 in principal) between July 1, 2015 and June 30, 2016, a TOP 3,180,813 repayment (TOP 3,180,813 in interest and TOP 0 in principal) between July 1, 2016 and June 30, 2017, a TOP 3,037,675.75 repayment (TOP 3,037,675.75 in interest and TOP 0 in principal) between July 1, 2017 and June 30, 2018, a TOP 9,883,177.96 repayment (TOP 2,909,743.58 in interest and TOP 6,973,434.38 in principal) between July 1, 2018 and June 30, 2019, a TOP 2,820,633 repayment (TOP 2,820,633 in interest and TOP 0 in principal between July 1, 2019 and June 30, 2020, and no repayment of principal or interest between July 1, 2020 and June 30, 2021. Approximately 60 percent of the proceeds of the loan were earmarked for direct government capital spending while the remaining 40 percent was earmarked for on-lending to the private sector for office, residential, and retail construction activities in the CBD. The Government of Tonga on-lent to private sector entities at an interest rate of 5%. The purpose of the project was to reconstruct the Central Business District (CBD) of the city of Nuku'alofa. It involved the (a) rehabilitation of the storm water drainage; (b) resurfacing of streets; (c) renovation of sidewalks; (d) landscaping work of the central city park with streetlights; (e) installation of new power supply, including some underground power supply; (f) construction of a soakway for effluent water from septic tanks; (g) extension of the Royal Palace; (h) construction of a new wharf (‘Vuna Wharf’) to attract cruise ships; and (i) reconstruction of office, residential, and retail space (including the Tungi Colonnade, Taumoepeau Building, O.G. Sanft Building, Molisi Tonga Building, and Royco Building). CCECC was the general contractor responsible for implementation, alongside China Railway Construction Corporation (CRCC). Construction began on November 18, 2008. Phase 1 of the project (including the reconstruction of the Tungi Colonnade, Taumoepeau Building, O.G. Sanft Building, Molisi Tonga Building, the Royco Building, and the Royal Palace) was officially completed on November 19, 2010. Phase 2 (which included the establishment of a “Central Park" at the corner of Taufa’ahau road and Wellington road, improvements to sidewalks, roads and drainage systems, the reconstruction of Tungi Arcade, and the construction of Vuna Wharf) commenced on January 10, 2011. All Phase 2 activities, excluding the construction of Vuna Wharf, were completed on or around August 14, 2012. The construction of Vuna Wharf was officially completed and handed over to the local authorities on August 12, 2014. However, this project was controversial in that it contributed to debt sustainability problems for the Government of Tonga. According to a Joint IMF/World Bank Debt Sustainability Analysis that was published in 2011, the combined face value of the RMB-denominated China Eximbank loan for the Nuku'alofa Central Business District (CBD) Reconstruction Project (captured via Record ID#37646) and the RMB-denominated China Eximbank loan for Phase 3 of the National Road Improvement Project (captured via Record ID#39199) was equivalent to 30% of Tonga’s GDP. Then, In May 2012, the IMF published a report which concluded that “Tonga remains at a high risk of debt distress based on the joint IMF-WB low-income country debt sustainability assessment (LIC DSA). Scheduled repayments on the two loans … from the China EXIM Bank may pose a fiscal challenge unless sufficient cash reserves are built up by improving tax collections and reining in current expenses. [The Government of Tonga’s] balance sheet also faces a currency risk as about 61 percent of the outstanding external debt is denominated in Chinese renminbi.” Due to concerns about Tonga’s public debt levels, the repayment terms of the China Eximbank loan for the Nuku'alofa Central Business District (CBD) Reconstruction Project (via grace period extensions) were rescheduled two times: once in 2013 and again in 2018 (as recorded in Record ID#64926 and Record ID#73428). A September 2013 debt rescheduling agreement between China Eximbank and the Government of Tonga amended the original borrowing terms by extending the grace period from 5 years to 10 years. All other borrowing terms (maturity, interest rate, and fees) were left untouched. The loan was thus rescheduled for semi-annual repayment between September 21, 2018 and September 21, 2028. Then, in November 2018, China Eximbank and the Government of Tonga signed a second debt rescheduling agreement, which amended the original borrowing terms by extending the grace period from 5 years to 15 years. All other borrowing terms (maturity, interest rate, and fees) were left untouched. The loan was thus rescheduled for semi-annual repayment between September 21, 2023 and September 21, 2028. As a result of these reschedulings, the borrower agreed to repay the lion’s share of the loan’s principal (in semi-annual installments) over a 5-year period (September 21, 2023 and September 21, 2028) rather that a 15-year period (September 21, 2013 and September 21, 2028).