PM pushes currency swap deals

The Prime Minister's Office has issued fresh instructions to finalise currency swap agreements with the European Union (EU), Russia and Iran, in a move that can lessen dollar dependency and integrate trade with regional economies.

The agenda of currency swap agreements has been made part of the Ministry of Finance's strategic reforms initiative, and the Prime Minister's Office has sought details about progress on these potential deals from the Ministry of Finance.

The reform framework has been finalised for key federal ministries, including the finance ministry, by the Prime Minister's Office, and the PM's Delivery Unit is responsible for its monitoring.

Government sources said the government wanted to sign currency swap agreements with Iran, Russia, the EU and Association of Southeast Asian Nations (ASEAN) member countries on the lines of the Pakistan-China currency swap agreement. The sources said agreements with Russia and Iran could also open avenues for trade.

Under the Pak-China swap deal, Islamabad has availed a $4.5 billion trade facility but has largely used the money to settle its debt obligations. The facility is part of the $16.4 billion foreign exchange reserves – a portion of which will be used to settle $4.8 billion in foreign debt this month until fresh loans are arranged.

Pakistan on Tuesday repaid its $1.3 billion Eurobond debt, the first major settlement as part of the $4.8 billion repayments this month. After making the payment, Finance Minister Muhammad Aurangzeb said Pakistan remained committed to honouring its external obligations in a timely manner. He underlined that the Eurobond repayment was being executed in an orderly manner, reflecting the country's continued resolve to uphold its financial commitments and credibility in international financial markets.

The PM's Office asked the concerned ministries last week to provide an update on reforms that have been implemented, are in progress or are falling behind deadlines. The sources said currency swap agreements with Russia, Iran, the EU and ASEAN member countries are listed as work in progress under Pakistan's strategic roadmap.

The prime minister has also tasked the finance ministry with making plans, in consultation with the central bank, to bring the policy rate below 10%. This development came in the middle of Pakistan's fresh commitment to the International Monetary Fund (IMF) to increase interest rates to contain inflation.

According to another direction issued by the PM's Office, the finance ministry should ensure monetary market stabilisation for meaningful appreciation of the rupee against foreign currencies. Pakistani authorities have also assured the IMF they would end restrictions on currency controls. The IMF is asking to end targets given to commercial banks to surrender dollars to the central bank and lift restrictions on outbound movement of foreign currency, provided they have sufficient resources.

The government is also working to strengthen regulations to control manipulation of the exchange rate, hoarding and smuggling of foreign exchange. The sources said the PM's Office has asked the finance ministry and the central bank to check hoarding of currency, as the market was anticipating devaluation due to $4.8 billion debt repayments this month.

Pakistan is also keen to use the Asian Clearing Union mechanism for trade payment settlements. The finance ministry has been tasked with launching an awareness campaign for importers, exporters and investors regarding regulatory frameworks introduced to facilitate trade with China in RMB and for settlements of trade payments through the Asian Clearing Union.

Mounting debt is also eating up a major chunk of the federal budget, and the PM's Office has tasked the finance ministry with bringing down high debt levels. However, the Ministry of Finance treated the launching of the Medium Term Debt Management Strategy 2026-28 as part of its achievement, although the goals mentioned in it are unlikely to be achieved.

According to these ambitious targets, the government wants to reduce the debt-to-GDP ratio to 61.5% by 2028 – which may not be achieved due to current high levels. External debt is also targeted to be reduced to 17.9% of GDP by 2028, and interest payments to 4.9% of GDP by 2028.

The PM's Office also wants the current account deficit to be kept below $3 billion and gradually converted to a surplus. The finance ministry has also been tasked with ensuring sustained GDP growth in the range of 4% to 5% for the first two years, gradually increasing it to 6-8% by 2029, and enhancing the size of GDP to $500 billion.