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Pakistan-China currency swap: how the deal supports?

Researchers revealed that the exchange rate is a significant factor in this globalization era while considering any state to trade globally because lower currency rate make its exports cheaper and higher make it expensive vice versa. They have also urged that exchange rate also has larger impact on profitability of businesses where they have Foreign Direct Investment (FDI). Exchange rate may also improve the risk and uncertainty to dramatic extent in case of international investment.

It is studied about fluctuation in exchange rate impacts on trade flows. It is also said that important determinants which may cause volatility of exchange rate are interest rate differentials, inflation differentials and current account deficit and last which is most significant is public debt.

Researchers also urged that the sound macroeconomic strategies, inflation management may handle the difference in exchange somehow which cause payment deficit. Proper understanding and management of determinants of exchange rate give assist and clear view towards developing sound exchange strategies to attain desired economic growth. Further studies also mentioned that financiers may invest in that economy where exchange rate is steady because in that type of economy where exchange rate volatile risk is higher and risk aversion financiers never invest in this type of economy.

To boost up the economy exchange rate must be managed for this purpose while the determinants must be focused. According to sources, Pakistan and China recently have agreed to do business in Pakistani rupee and Chinese currency. Earlier, both countries were doing trade in dollar. It is also mentioned that China, Russia and Turkey had been struggling against the supremacy of dollar, however Pakistan joined the trio presently. This accord between China and Pakistan will bring dollar value down in Pakistan. Dollar has touched Rs133 in Pakistan.

Presently, Pakistan and China have accepted to trade in their domestic currencies in an attempt to decrease dependence on the US dollar. Sources recorded that the currency swap arrangement (CSA) between State Bank of Pakistan (SBP) and People’s Bank of China (PBOC) had already been enlarged for a period of 3 years in respective local currencies. Furthermore, both states viewed satisfaction at the operationalization of the currency-swap deal and reaffirmed the need to more strengthen cooperative ties of financial and banking sectors between the 2.0 states.

According to a statement from the Chinese bank, the swap was sized at 20 billion yuan ($3.1 billion). We know that a currency swap deal allows two institutions to exchange payments in one currency for equivalent amount to facilitate bilateral trade settlements and provide liquidity support to financial markets. Statistics also revealed that the demand for dollars remains high in the open market; the Chinese living in Pakistan and doing business are buying dollars, causing the demand to increase, while importers need dollars to settle their own trades.

 

State Bank of Pakistan (SBP) in its recent Monetary Policy Statement 2018 has raised policy rate because of devaluation, hike in oil rates and build up of further demand pressures. The monetary officials have showed overheating of economy because of demand-led pressures. The government had also stated to take additional initiatives to make the Currency Swap Arrangements (CSA) usable with China. It is also recorded that China is now Pakistan

’s largest trading partner and we are recipients of a huge FDI in CPEC-related projects. It is also mentioned that it is natural that the currency composition of Pakistan’s trade changes accordingly from dollars to that of local currencies i.e. yuan and rupee.

No doubt, the dispute about utilizing domestic currencies under CSA in bilateral trade is unsettled in Pakistan. The Chinese government has proposed to use yuan, instead of the US dollar. Statistics also showed that during December, 2011, SBP inked a 10 billion Yuan Currency Swap Arrangement with Peoples Bank of China (PBC), and during 2013 SBP invited bids from all commercial banks selling yuan against the rupee.

Presently some economists believe that using local currencies in bilateral trade will be very beneficial for our country, particularly when it comes to current account deficit and demand pressure on dollar. Sources also recorded that the CSA works like this; a Chinese exporter is paid in rupees. The exporter takes this international currency to a Chinese bank and converts it to yuan. The bank, then, can exchange these rupees for yuan with the PBC. By reversing the swap with SBP, PBC can easily convert these rupees to yuan. The logic would be the same if roles are reversed. Each time an importer in Pakistan purchases Chinese goods it should be registered as an import with a contra-entry that would record fewer assets in yuan, resulting in a net short position (a net claim) in the International Investment Position (IIP) of the country.

China’s causes for entering into the swap may be to serve its economic interests offering opportunity to settle trade and investing as FDI in yuan, while sustaining monetary control over its currency. On the face of emerging issues various adepts are asking how we can sustain real-sector growth through CPEC-related investments with falling foreign exchange reserves. Presently, SBP statistics shows that the rupee weakened against the dollar at Rs138.74/Rs139.08 in the inter-bank market during the second last week of December 2018.

Conclusion

We will remain in perpetual debt by importing value-added goods and exporting unfinished low-value products. Now is the time to make policy adjustments by curbing the undue consumption through widening the tax net and solving the problem of under-invoicing via stringent custom control.

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