Pakistan and China on Friday signed a currency swap arrangement to promote bilateral trade and investment and strengthen financial cooperation.
State Bank of Pakistan (SBP) and People’s Bank of China (PBC) signed the currency swap arrangement in Islamabad, announced the central bank. The agreement was signed by SBP Governor Yaseen Anwar and PBC Deputy Governor DU Jinfu.
This is the second currency swap agreement that the government has signed with any country. Earlier, Pakistan and Turkey inked a similar arrangement with an option to trade in each other’s currencies equivalent to $1 billion.
An official handout said the bilateral currency swap arrangement has been concluded in 10 billion Chinese yuan and 140 billion Pakistani rupees. The programme will expire in three years, but can be extended with mutual consent. Pakistani importers can pay for Chinese goods in local currency.
“We expect that bilateral trade and investment will grow between Pakistan and China as a result of this agreement, further augmenting economic ties between the two countries,” it added. This agreement will contribute significantly to further strengthening close and special relationship between the two countries.
The currency swap agreement will give a positive signal to the market on availability of the other country’s currency on the onshore market, said the central bank, adding as a result it will promote bilateral trade denominated in Chinese yuan and Pakistani rupee.
Arrangement raises questions
However, industry insiders suspect that China will later convert the arrangement into a loan as it has expressed little interest in trading in Pakistani currency. On the loan, it can charge mark-up at a rate more than the Shanghai interbank market rate.
The insiders said when Pakistan proposed Beijing to sign the currency swap agreement China refused to deal in Pakistani currency. They said Pakistan had also proposed China to buy its treasury bills with the swap money, but Beijing refused.
They said Pakistani importers may still have to pay in Chinese currency despite signing of the swap arrangement.
Despite repeated attempts, State Bank officials were not available for comment.
Total volume of bilateral trade was $7.4 billion last year, tilted in favour of China. Pakistan’s exports to China stood at $1.6 billion compared to imports worth $5.8 billion, showing a deficit of $4.2 billion, said the commerce ministry.
Published in The Express Tribune, December 24th, 2011.