INTERVIEW WITH MUHAMMAD MANSHA CHURRA, EX-VP, FPCCI
Feb 27 - Mar 4, 2012
i. Immediate Past Vice President the Federation of Pakistan Chambers of Commerce and Industry (FPCCI)
ii. Member Executive Committee (2012-13) SAARC Chamber of Commerce and Industry
iii. Member Executive Committee (2011-12) Indo-Pak Chamber of Commerce and Industry,
iv. Vice Chairman & Trustee, Karachi Port Trust
v. Senior vice President Karachi Chamber of Commerce and Industry
vi. Charter Member & President Karachi Taimuria Lions Club
i . Churra Silk Mill
ii. Churra & Co
iii. Adma Industries
iv. Adma Trading House
v. Shabir Industries
vi. Imran Industries
PAGE approached Muhammad Mansha Churra for his take on the bilateral Currency Swap Arrangement (CSA) between Pakistan and Turkey. Following are the extracts of what he said.
Pakistan and Turkey agreed on a three-year currency swap arrangement worth of $1 billion in equivalent of local currencies.
The agreement aims to promote bilateral trade and direct investment between the two countries and provides short-term liquidity to stabilize the financial market. The core objective of the arrangement, which will be for three years, is to finance bilateral trade in local currencies of the two countries. This agreement represents a significant achievement for both Pakistan and Turkey in promoting and enhancing not only bilateral trade, but also the opportunity to significantly increase investment in Pakistan going forward.
This CSA is a bilateral financial transaction. All terms and conditions will apply equally to both countries and the pricing is based on standard market benchmarks, which are widely acceptable in the respective domestic markets of Pakistan and Turkey. A currency swap is a simultaneous sale of a currency on the spot market together with the purchase of same amount on the forward market. By combining these two transactions into a single one, transaction cost may be reduced. A currency swap may take several forms for a couple of purposes. In this instance, it is a foreign-exchange agreement in which two parties exchange units of their respective currencies for the purpose of decreasing exposure to exchange rate fluctuations.
The bilateral CSA between Pakistan and Turkey will reduce the pressure on the foreign exchange reserves and give a quantum jump to the bilateral trade between the two countries. It will reduce the exchange rate risk. As Pakistani rupee is pegged with US dollar, depreciation in rupee value against US dollar will not increase payments to Turkey etc. Pakistan and Turkey will trade without using a hard currency like US dollar for the equivalent of a sum of US dollar one billion. It will serve as barter trade with Turkey and such regional trade will be beneficial for both Turkey and Pakistan without putting pressure on the two countries foreign exchange reserves.
Pakistan's trade gap broadens due to high import bill. When oil price rises, its ultimate effect is on Pakistan's current account. Moreover, depreciation of rupee has negative impact on current account deficit, inflation, and specific industries. In such situation, the currency swap arrangements with other major trading partners could reduce dollar demand and stabilize the rupee. With this currency swap facility, the traders and businesspersons of the respective countries would be able to trade in their respective currencies. The need to look for dollars or other foreign currencies to do business will be eliminated.
Current volume of bilateral trade between Pakistan and Turkey is US$899 million during 2010-11. Pakistan's exports to Turkey total US$751 million while import is US$148 million. Presently, balance of trade of US$603 million is in favor of Pakistan. Therefore, Pakistan's position after the operation of swap arrangement would be more stable. The currency swap arrangement between Pakistan and Turkey will boost trade and investment and strengthen financial cooperation.
Importers with letters of credit denominated in Lira: On the maturity date of the letter of credit (LC), the importer will pay off the overseas supplier by borrowing in Lira. Availability of onshore Lira financing will encourage importers to open Turkish Lira denominated LCs.
Exporters with letters of credit/contracts denominated in Turkish Lira: Once the contract is established, the exporter will borrow in Lira, sell Turkish Lira against PKR and utilize PKR for its local operations. On the maturity date of the contract, the exporter will receive Lira from the overseas buyer and pay off the Lira loan locally. Same concept will apply to Central Bank of the Republic of Turkey (CBRT) drawing PKR against the swap line and lending the same to banks in Turkey.
State Bank of Pakistan can purchase Lira from Central of Bank of Republic of Turkey (CBRT) against its local currency (PKR), and repurchase its local currency with the same Lira on a predetermined maturity date and exchange rate. Similarly CBRT can also purchase PKR against Lira.