CBE makes RMB 18 billion drawdown under currency swap agreement with PBOC in 2019

On December 6, 2016, as part of a bilateral financing package required ahead of the approval of an IMF loan, the Central Bank of Egypt (CBE) and the People’s Bank of China (PBOC) signed an RMB 18 billion (EGP 47 billion), three-year bilateral currency swap agreement to facilitate trade and improve foreign currency liquidity in Egypt. Then, on February 10, 2020, the RMB 18 billion (EGP 41 billion) currency swap agreement was renewed for another three years. In early 2017, the CBE made a (gross) drawdown under the currency swap agreement equivalent RMB 18 billion. The PBOC credited RMB 18 billion to the CBE's account held with PBOC, and the CBE credited PBOC's account held with CBE with the EGP equivalent (49,249,800,000) of RMB 18 billion, based on the RMB-EGP exchange rate of 1:2.7361 at that time. The borrowing (drawdown) carried an estimated maturity of 1 year and an unknown interest rates (based on SHIBOR plus a margin). According to CBE, it made four additional (gross) drawdowns under the PBOC currency swap agreement: an RMB 18 billion drawdown in 2018, an RMB 18 billion drawdown in 2019, an RMB 18 billion drawdown in 2020, and an RMB 18 billion drawdown in 2021. These borrowings (drawdowns) also carried estimated maturities of 1 year and unknown interest rates (based on SHIBOR plus a margin). The CBE’s 2017 drawdown is captured via Project ID#89406. Its 2018 drawdown is captured via Project ID#89408. Its 2019 drawdown is captured via Project ID#89410. Its 2020 drawdown is captured via Project ID#96200. Its 2021 drawdown is captured via Project ID#96201. The (principal) amount outstanding under CBE’s PBOC swap facility was RMB 0 in 2016, RMB 18 billion in 2017, RMB 18 billion in 2018, RMB 18 billion in 2019, RMB 18 billion in 2020, and RMB 18 billion in 2021.

Additional details

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 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. CBE’s currency swap with the PBOC is classified as ‘short term debt’ in the Government of Egypt’s 2020 bond prospectus and in various CBE reports. CBE defines short-term debt as debt ‘with [an] original maturity of up to one year,’ so AidData has coded the maturity length as 1 year for the time being. A paper prepared by the Central Bank of Egypt indicates the 'withdrawal and utilization' period to be up to one year in the currency swap (see https://www.imf.org/external/pubs/ft/bop/2017/pdf/17-25a.pdf). However, the precise term (maturity length) of the swap agreement is unknown. This issue requires further investigation. 4. The interest rate that applied to CBE’s RMB 18 billion drawdown is unknown, but it was very likely SHIBOR plus a margin (see https://www.imf.org/-/media/Files/Publications/WP/2021/English/wpiea2021210-print-pdf.ashx). This issue requires further investigation. 5. 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. 6. 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.

Number of official sources

10

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