Currency swap arrangement with Turkey comes into force

Move to enhance bilateral trade and allow easier settlements.

KARACHI: A three-year bilateral Currency Swap Arrangement (CSA) between the State Bank of Pakistan (SBP) and the Central Bank of the Republic of Turkey (CBRT) has been implemented from Tuesday, amounting to $1 billion in equivalent local currencies.

The SBP has issued necessary instructions to banks for the implementation of the agreement, after due consultations with various stakeholders and completion of operational formalities with CBRT. Top officials of the SBP hope that this agreement, along with a similar agreement with China, will ease some pressure off the foreign reserves of Pakistan.

Under the arrangement, SBP will have the ability to draw on the swap line with CBRT and provide Turkish lira (TRY) to banks in Pakistan. Banks will then loan Turkish liras to importers and exporters who are involved in trade denominated in the currency. At maturity of these loans, the importer and/or exporter will repay the foreign currency it receives from its trading partner to the lending bank, which in turn will repay the sum to the respective central bank.

Faisal Shahji, head of research of Standard Capital Security, said this agreement will increase bilateral trade between Turkey and Pakistan.

“But one thing the SBP should consider is that the benefits of this agreement trickle down to all importers and exporters, and not just leading players,” Shahji said. “Since Pakistan exports many textile related products to Turkey, I fear that few leading exporters may benefit from the development, while smaller ones may not get as much help.”

This currency swap agreement and an expected agreement with China will help increase regional trade, he added. “The SBP should actively pursue similar agreements with Saudi Arabia and Malaysia, from where we import a large amount of crude and palm oil, to ease pressure from its foreign reserves,” he concluded.

Objectives and structure
of the CSA

The objective of the currency swap is to promote bilateral trade between the two countries in the respective local currencies and any ‘other’ purpose as mutually agreed between the two central banks. Since the CSA is a bilateral financial transaction, all terms and conditions apply equally to both countries and the pricing is based on standard market benchmarks which are widely acceptable in the respective domestic markets.

Implementation guidelines from the SBP

The CSA between the two central banks will be a positive signal to the market on the availability of the other country’s currency in the onshore market.

The arrangement will augment the pool of liquidity available to finance bilateral trade between the two countries, supplementing the already available sources of liquidity, a SBP release said on Tuesday.

In order to ensure transparency in the determination of the market interest rate, the SBP has decided to conduct competitive auctions of the Turkish Lira Loan Facility.

For instance, all commercial banks will be allowed to take FE-25 deposits and extend FE-25 loans in the Turkish Lira for financing of Imports/Exports in accordance with SBP’s prevailing instructions on FE-25 loans/deposits. Necessary instructions to this effect have been issued in FE Circular No 4, dated September 4, 2012.

Participation in the auctions will be dependent on the submission of documentary evidence of export or import bills denominated in the Turkish Lira. All scheduled banks will be eligible to participate in such auctions.

Published in The Express Tribune, September 5^th, 2012.