Sep 14 - 20, 2009

PAK-CHINA currency swap accord will be beneficial to financial stability for both the parities in agreement for Pakistan this means reduction of dependency on greenback to a satisfactory extent and thus a workable mode to minimize current account deficit and tide over macro economic imbalances. Although Pakistan's economy is showing sign of improvement with foreign reserves increasing and significant cutback in inflation from 25 to 11 percent, economists do not find them as indications of stability in long term, which can only be gained, according to them, through cutting cost of financing and developing strong liquidity position.

Under the currency swap agreement, for example, China may accept Pak rupees and share dollar with Pakistan to a predefined ceiling and similarly Pakistan may accommodate yuan and transfer dollar to China. Dealing between China and Pakistan in local currencies may not only control the flight of foreign capital but also it induces foreign investment in Pakistan that is in need of foreign investment to give boost to its economy. Besides, bilateral trade minus dollar may prove a stimulating measure to restore sustainable economic growth of the country. It would be like insurance for Pakistan against falling reserves.

Pakistan's foreign reserves crossed $14 billion mark by the start of this month. The country received $747.22 million remittances July 2009 while it got $735.17 million in previous month. Overall remittances in FY09 stood at $7.81 billion as against $6.45 billion in FY08. The situation was not alike in recent past when reserves could barely meet nine weeks import bills and dropped to $6 billion in November last year. Rescue provided by IMF through $7.6 billion then another $3.2 billion loans staved off the economic meltdown, but unleashed micro economic furor and increased debt services obligations of Pakistan.

With no other option before, Pakistan needs to look for multilateral loans and financial aids to face balance of payment crisis. The loans are temporary solutions to fiscal imbalances and until permanent measures are taken towards revenue management. European Union and USA are two major markets for Pakistani products. Trade volume of Pak-China is however around $3 billion. Balance of trade is in favor of China right now. State bank of Pakistan received $660.75 million export proceeds from China and transferred $2.7 billion as import payments during July-June 2008-09.

It is relevant to recall President's direction to Governor State Bank of Pakistan to negotiate currency swap agreement with China after his last visit to China July this year. No formal agreement has been brokered between the two countries since then; however, it is under process. Spokesperson SBP Syed Wasimuddin has confirmed to PAGE that Pak-China currency swap talks are underway. He did not disclose that when such agreement would be finalized.

The importance of currency swap arrangement is equally significant for Chinese economy for two reasons. First, China is eagerly striving to internationalize yuan and bilateral currency swap agreements with different countries in the region are to make its struggle successful. So far People's Bank of China- central bank -has gone into six currency swap agreements, involving 650 billion yuan, with Bank of Korea, Hong Kong, Malaysia, Belarus, Indonesia, and Argentina. Some skeptics see such an active conduct of currency swap with foreign countries is an opportunist attempt of China to cajole foreign countries in to using yuan amidst deteriorating position of dollar in the world market. "The UN Conference on Trade and Development (UNCTAD) said in the report that the system of currencies and capital rules which bind the world economy is not working properly, and was largely responsible for the financial and economic crises," Xinhua reported.

Financial crisis has battered the US economy forcefully. World Economic Forum has already expressed doubt over the health of US's economy, placing it on 93rd among 133 countries in the WEF's Global Competitiveness Report. The report says financial crisis has aggravated the macro economic adversities of the US economy. Heavy stimuli to collapsing institutions and troubled financial sector caused exacerbation markedly escalating its budget deficit. "More generally, given that the financial crisis originated in large part in the United States, it is hardly surprising that there has been a weakening of the assessment of its financial market sophistication, dropping from ninth last year to 20th overall this year in that pillar," AFP cited WEF as revealing.

China's interest in cross currency swap has roots in its visionary approach to maintain sustainable growth of its economy, which is projected to have growth rate of 7 to 8 percent this year. The rate is unique in other countries in Asia. Financial cooperation that is slowly becoming international is imperative for China to meet short-term liquidity needs. For developing economies, this is an essential consideration in economic planning. Second China is making currency swap agreements with countries to negate the spillover impact of dollar devaluation on its trade especially its equipment manufacturing industry that requires immediate restructuring. Chinese government plans to overhaul structure of industry and instill innovation in industrial design. It has announced expenditure of 20 billion yuan (2.94 billion dollars) for this year, from a 908 billion yuan public sector budget, to help enterprises upgrade technology, energy efficiency, and innovation. That can be possible with availability of raw materials that are imported in the country. Therefore, Chinese central government exempted key components and raw materials imported by domestic enterprises for manufacturing major technological equipment and products from import tariffs and value-added tax this year. Currency swap is stirred by comparative advantage. With bilateral trade extremely in favor of China, Pakistan can promote sectors and products it has specialization over to strike balance. The local currencies acceptance can at least alleviate the cost of funds transference and of PKR uncertain position against dollar.