Pak-China currency swap – wait and watch

With all eyes on the upcoming budget, very few people realise there is an auction, under the central bank’s Chinese Yuan (CNY) Loan Facility, due to be held on June 4. The State Bank of Pakistan had entered a bilateral currency swap arrangement with the People’s Bank of China (PBC) in December 2011, which was implemented earlier last month.
For the uninitiated, here is how a currency swap arrangements (CSA) will work. The CSA will be executed for a three-year tenor amounting to Rs140 billion and CNY10 billion, extendable on the mutual consent of the respective central banks.
The SBP can purchase the Chinese currency from PBC against the rupee, and repurchase the same on predetermined dates and rates. The pricing will be linked to the interest rate differential between PKR and CNY. The SBP will lend the CNY to banks which will further lend it to importers who will borrow the CNY to pay off the Chinese supplier.
Likewise, the exporter will borrow in CNY and utilise rupee for its local operations by selling CNY. On maturity of the contract, the exporter will pay off the CNY loan locally, having received CNY from the overseas buyer.
The idea behind CSA is to supplement the available pool of liquidity between the two countries to finance the bilateral trade. China is Pakistan’s most significant trading partner, with Pakistan importing the most from China during 10MFY13.
The SBP maintains that the key aim of the currency swap is to promote regional currencies for trade settlement. China already has currency swap arrangements (CSA) with more than 20 countries, and with the CSA with Pakistan, it aims at enhancing CNY’s role in international investment and trade. Financing direct investment is also penned as a key objective of the CSA, though it’s difficult to say how will that help considering that China’s share in FDI in Pakistan has not been of any significance to speak of.
Pakistan can surely benefit from the CSA should the structure fall well in place and banks and traders combine to take keen interest. The SBP had asked the banks to conduct awareness programmes for traders regarding the CSA. The upcoming auction on June 4 will certainly indicate the keenness and awareness or the lack thereof at the traders’ level.