High trade imbalances with Malaysia have convinced Pakistans economic managers to chalk down a strategy along the lines of the yet-to-be-inked Pak-China bilateral currency swap arrangement. Let us be reminded that Malaysia is Pakistans fifth largest trade partner, but as is in most cases, Pakistan is on the wrong side of the coin with a trade deficit exceeding $1 billion per year.
Pakistan entered into Free trade Agreement (FTA) with Malaysia back in August 2007, with the Early Harvest Programme operational from January 2006 - a move that did not turn out to be a wise one and met the same fate as that of other such FTAs. Historical data of the bilateral trade makes an interesting read in this regard as imports from Malaysia in FY09 more than doubled compared to that in FY05. (See graph)
But while the post-FTA regime has widened the trade gap between the two nations, the abolishing of duties on palm oil - the single most important contributor to the import bill from Malaysia - has to take the larger share of the blame. There is no denying that the removal of duties on import of palm oil resulted in huge imports which is why the Pak-Malaysia FTA is often termed as Palm Oil FTA by the badly hit local industry.
What inflated the import bill even more was rupees depreciation against the U.S dollar in the post-Musharraf regime, as the then new government under the umbrella of IMF had to remove what many termed as an artificial lid on the value of rupee.
The resulting 30 percent rupee depreciation led to a potential loss of almost Rs 3 billion in terms of import payment for the first time in five years. To make matters worse, the Malaysian ringgit was on a steady ride against the dollar in the same period, yielding a double blow to the import bill.
Ever since, the rupee has found it hard to find firm footing, even against the globally struggling dollar. And this is what has opened the doors for a currency swap as the FTA regime offers no respite to the import payments in the future. The situation demands for another way out and certainly the currency swap can serve the purpose to a good extent.
For this to happen, the central banks of both the countries will need to keep the reserves of other party- for which initial working has already started between the two banks. Not only will the currency swap reduce the reliance on dollar reserves, but will also lower the transaction costs and avoids the risk of exchange rate fluctuations - all the meanwhile doing a world of good to rupees stature.
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