This year is dawned with the possibility of use of Yuan for denominating foreign currency transactions in Pakistan. The Chinese currency will diversify the Pakistan basket and it is not bad at all, seeing the new global realities of Pakistan. Just to give a perspective of importance of CYN for Pakistan, the current account deficit was $12.4 billion in FY17, while the trade deficit with China alone was three fourth of it ($8.9bn). If that is converted into debt based in Yuan, there is little need to go to international debt market or to revert to the IMF for balance of payment cushion.
Now put the relationship with US into the equation; it is an indication Pakistan might look towards China for a bailout. The souring relationship with the US might not have much of direct impact on country as stopping $million would be mere 2 percent of the anticipated CAD in FY18.
What is more important is how the West influenced multilaterals behave towards Pakistan going forward. As the money coming from WB, ADB and similar institutions is on soft conditions and is helping build the structural and infrastructure gaps in the country. And much of other foreign money coming into the country is influenced by multilaterals, especially, the IMF’s outlook on Pakistan.
Borrowing in Chinese currency is going to be a hedged strategy against probable drying resources from the West. It is good strategy for Pakistan in the short to medium term as an alternate avenue to raise debt is created. The question is how it would impact in the long run and what benefit Chinese could accrue from it.
The currency swap arrangements have already been signed with People’s Bank of China to promote CNY in Pakistan for bilateral trade and investment with China. Banks in Pakistan are allowed to accept CNY deposits and CNY trade loans.
Chinese coming into Pakistan may open deposit accounts in Pakistan banks and that money can be used to lend against imports proceeds from China. There is a case of fast creation of Yuan based debt in Pakistan. The Chinese companies coming into Pakistan can make the arrangement of converting Chinese debt into rupees for investment in Pakistan based assets.
The counter party agreement with the owners of Chinese debt in Pakistan can take place in China. The final outcome could be Chinese having enough liquidity in Pakistan to go for a buying spree. The Chinese companies would have the leverage to buy businesses and more importantly land in Pakistan.
A likely scenario could be Chinese buying bulk of agriculture and other land, and businesses in Pakistan to increase Chinese domination in Pakistan. On the flip, Pakistan authorities could have a cushion against balance of payment worries in the short to medium term to keep on fueling debt based growth. In short, today’s consumption is going to be fueled by Chinese dominance in land ownership and businesses for generations to come.
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