BENEFITS OF CURRENCY SWAP AGREEMENTS
TARIQ AHMED SAEEDI
Feb 27 - Mar 4, 2012
Pakistan and its trading partners are compelled to do the trade transactions in a currency shortage of which leads to balance of payments crises. Pakistan, which has a bulging trade deficit, often runs out of foreign reserves because of international obligations to make payments in U.S. dollar. To prevent impact of freefall in dollar stocks on the economic indicators, international economies are promoting alternative to the U.S. dollar. Stable economies with trade surplus are successfully replacing greenback with local currencies in bilateral and multilateral trade payments.
Pakistan is trying to tread on the path laid out by these economies. Will this be good or not is a question to be answered when its currency swap agreements initially with China and Turkey will come to fruition.
It is obvious that the purpose is to lower pressure on Pak rupee and leverage its value against dollar. For currency traders, it is not possible in the short term, and according to them, pressures on rupee could not lower overnight.
Nonetheless, it does not need a rocket science to take as fact that international trade in local currencies would offset the depletion, every now and then, of dollar reserves caused by foreign payment obligations.
Pakistan had to resort to international monetary fund (IMF) again in 2008 because of its whacked out foreign reserves and had it not been sanctioned loan, it would have not come out of balance of payments crisis.
Pakistan-China bilateral trade is increasing dramatically. From three billion dollars in 2005, the value of trade skyrocketed to $10.6 billion in 2011. Visibly, it is in China's favour as Pakistan's exports to it stood at $2.1 last year. However, comparing the exports of one billion dollars in 2008, that was a 100 per cent jump.
"If we have more exportable surplus, the vast Chinese market will be able to absorb our commodities and services. I have no doubt about that," Masood Khan, Pakistan's Ambassador to China, told APP.
"We have to work harder and go beyond the mark of $15 billion and then double it. The appetite for Pakistani products is increasing," he said.
The bilateral trade between China and Pakistan is governed by free trade agreement (FTA), which together with other trade conducive policies, has resulted into increase in trade volume over the years. The recent currency swap deal between the two neighbouring countries would collectively save them at least $1.6 billion that is a total value of 10 billion yuan and 140 billion Pakistani rupees-units of exchange under the agreement.
As the dollar's spectre is haunting the traders of Iran and Pakistan, there is also a demand of currency swap agreement between them doing the rounds in media. At present, Pakistani banks do not accept letters of credit of Iranian banks because of a flurry of sanctions from the western world on Iran. Since Iranian importers are facing dollar-paucity, they are finding it hard to settle import payments with their counterparts. Temporarily, this problem is being dealt by credit lines opened through agents in Dubai, but Pakistani exporters mainly of rice-that account for more than half of its total exports to Iran-are finding it commercial unviable to do trade with the neighbouring country from a third destination. Fruits and vegetables are two other important exports. The existing Pak-Iran bilateral trade is about $1.2 billion a year. The authorities of both the countries have recently resolved to increase trade to five billion dollars through stepping up economic cooperation. A currency swap deal can prove a timely antidote to the ailing two-way trade relations.
With overwhelming majority of business communities in favour of two-way trade between India and Pakistan rising from present $2.7 billion per annum, currency swap accord between the two historically estranged neighbours would also likely open window of massive trade and investment opportunities. Notwithstanding unresolved issues including that of non-tariff barriers on India's side and negative list that permits 2,000 Indian products into the Pakistani market, businesspersons in both the countries keep their fingers crossed to benefit from normalization of relationships.
The currency swap agreement of one billion dollars between Pakistan and Turkey is approximately equal to annual bilateral trade value.
Experts call for not only diversification of export baskets but also building of external trade links with the non-traditional markets. Usage of dollar-substitute in dealing with these markets will be beneficial.
However, there is an urgent need to improve health of the domestic economy first. The government has to take serious actions to resolve energy crisis in the country that is imperilling the survival of textile industry, which is the prime spinner of exports revenue. Hit by constant production losses and political instability, investors are shifting capital to the foreign countries.
Currently, gas and electricity shortages are the two critical issues facing the textile industry. Textile manufacturers urged the government to promote biogas that can be a perfect alternative to Sui gas in rural areas.
Chairman standing committee of National Assembly for textile, Muhammad Akram Ansari, said uninterrupted gas supply to the industry should be ensured. Talking to reporters during a meeting of Pakistan Apparel Forum (PAF) last week, he agreed that the government could materialize LNG import project within three months.
According to him, the textile exports may drop by four billion dollars this fiscal year. He also said that federal minister for commerce Amin Fahim has no time to address the problems of the industry that contributes 60 per cent towards the national exports. If the situation does not improve, it is very difficult to capitalize on emerging opportunities including waiver by EU, he said. A number of textile companies have winded up operations because of electricity load shedding. During last four months, 40 ginning units in Karachi have been closed down, according to an estimate by PAF.