CDB provides $20 million loan to National Bank of Tajikistan (NBT) for on-lending purposes in 2010 (Linked to Project ID#91981)

In September 2006, the National Bank of Tajikistan (NBT) and the Xinjiang Branch of China Development Bank (CDB) signed a $10 million loan (currency swap) agreement. CDB had ‘upsized’ the loan to $25 million by December 2008. These borrowings (captured via Project ID#91981) reportedly carried a 4-year maturity (final maturity date: September 2010) and an annual interest rate of 2.5%. The borrower (NBT) used the proceeds of the loan to on-lend to a select group of commercial banks for agricultural development activities at interest rates of 4%, 6%, or 14%. Then, in September 2010, NBT and CDB signed a signed a $20 million loan (currency swap) agreement (captured via Project ID#91982). This loan reportedly carried a 2.5% interest rate, an 11-year maturity (final maturity date: September 15, 2021), and a 5-year grace period. However, the borrower made its first principal repayment ahead of schedule on March 15, 2012. Its next principal repayment was scheduled for March 15, 2014 and thereafter the loan was repayable in equal semi-annual amounts until September 15, 2021. The annual financial statements of NBT provide evidence that repayments were made between 2014 and 2021.

Additional details

1. Multiple sources indicate that the September 2006 and September 2010 agreements between NBT and CDB were currency swap arrangements. A typical 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 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 3. The Chinese project title is 塔吉克斯坦国民银行货币互换项目. 4. The IMF claims that NBT’s borrowings from the CDB ‘were priced at 2.5 to 5 percent.’ This issue warrants further investigation.

Number of official sources

10

Number of total sources

23