Pakistan's currency market is more often than not volatile with its own adverse effects. A recent surge in value of US dollar vis-à-vis PKR is symptomatic of this fact. While the developing economies have limited options for maintaining a reasonable value of its national currencies vis-à-vis the international currencies, emerging currency swaps are available tools to contracting states.
China is a global leader for having been signed maximum number of currency swaps with other countries (more than thirty agreements signed with different countries worth 469 (B$) while the US has 333 (B$) swaps with just five countries only. China's impact on the global monetary system is far greater than existing market share and over 60 countries have modest RMB in their reserves. On October 1, 2016, the International Monetary Fund added the Chinese yuan to its basket of its reserve currencies, thus recognising China's growing importance in the world economy. Asian giant is striving to "internationalise" its currency RMB Yuan to serve multiple functions such as trade finance, payments for transactions, foreign exchange trading, measures of value and a sizeable component of foreign exchange reserves. China sponsored financial institutions like AIIB and Silk Road Fund, etc, have emerged successful in global support and are likely to surpass the Bretton Woods institutions in capitalisation by next decade. Pakistan signed currency swap agreement with China in 2011. Currency swaps are now very often used as a hedge against dramatic currency fluctuations and to solve liquidity problems. Pakistan could follow suit.
Geostrategic Recession is expected in 2017, which requires extra ordinary focus of the governments with dynamics of China to play an important role which is already quite evident from populist feelings in many important countries. Given the Chinese interests in Pakistan, pressure by large economies for tied assistance, our capital requirements for building the infrastructure and movement of the real economy, the opportunity at the doorstep should be availed rather more honourably. As a matter of fact, the CPEC projects themselves require unorthodox approach for project funding including their bridge financing.
With exports of 2,274.7(B$), imports at 1,680.6, trade surplus f594.1(US $Bn)and forex reserves and domestic savings around eight trillion US $ (looking for profitable venues), the true potential of more meaningful bilateral collaboration need not be over-emphasised; more-so in view of inherent complementarities of the two economies. We have a trade of more than 15 Billion that is far less than even the modest estimates per the strategic relationship and appetite of Chinese industry for the industrial and other raw materials available in Pakistan in abundance and initiatives like OBOR/CPEC.
Traditionally, Pakistan is a rather an eccentric currency storage country but given the level of involvement with Chinese economy - and its currency - we need, ultimately, to diversify the currencies that can be used for international trade could reduce Pakistan's long-time dependence on the US dollar as early as possible. Falling value has and will continue to lead drastic consequences in future for the value of PKR and debts. We will continue to be deprived of deriving true benefits from international trade besides having positive impact on the price structure that could be supported from Yuan-denominated trade from a regional economic force like China. Growth in Vietnam, Lao, Cambodia and many other countries bears ample testimony to this stark reality.
Pak-China currency swap could enable local importers of Chinese products to access yuan directly, without buying dollars -which have registered an upwards trends in both the formal as well as the black market. Usage of swap appears as an important viable option to facilitate vast majority of local businesses and traders needing hard currency.
So is the position of the Chinese enterprises engaged in trade as well as execution of contracts of large value in Pakistan under CPEC and other bilateral co-operation.
In terms of swap agreement, yuan could be bought by a certain amount at the going market exchange rate and vice versa. Utilisation of local currencies under Swap is far from satisfactory. Usefulness of currency swaps and a phenomenal increase in bilateral trade and investment after announcement of OBOR and CPEC, which will remain at the centre of Sino-Pakistan ties at least for a decade or more, are all the more essential reasons for thinking out of box including use of local currencies in bilateral trade for necessary dynamism.
Thus, implementation of existing limit of swap and its enhancement in due course will create a win-win situation with an extra tool for Pakistan to stabilise the current high USD demand, in addition to more FX liquidity at a reasonable cost while large Chinese contractors and increasing credits to Chine enterprises working in Pakistan will also derive due benefit by meeting local currency requirements in Pakistan including lesser currency exchange fatigue and bolstering economic ties with China. Consequently, the risks to growth will be reduced in both the countries.
(The writer is an ex-Economic Minister, Beijing and one of the negotiator of currency swap with China in 2010)