KARACHI: Pakistan will no more have to use the US dollar as an intermediary currency to trade with China since a currency swap arrangement (CSA) between the State Bank of Pakistan and People’s Bank of China (PBoC) has been implemented from Tuesday, the central bank said.
The swap agreement amounts to Chinese Yuan (CNY) 10 billion ($1.62bn) and Rs140 billion ($1.45bn).
Analysts said that with the execution of this agreement, Pakistan and China now will be able to trade directly within their own currencies.
The trade volume between China and Pakistan stood at $12.4 billion in 2011-12.
The currency swap is a foreign exchange agreement between the two banks to exchange the equal net present value principal of a loan denominated in a different currency at a determined time, and pay the interest corresponding to each currency.
This move is expected to push the global use of yuan and increase the influence and share of China in regional and international trade, they said.
The two countries are important trading partners, but most of their mutual trade is denominated in US dollars, said the analysts. Now, Pakistan will add Chinese currency to its foreign exchange reserves, they added.
Under this agreement, the Pakistani importers will settle their letter of credits in Pak rupee instead of dollars in the Chinese banks.
In order to ensure transparency in determination of market interest rates, the SBP has decided to conduct competitive auctions of CNY loan facility. As part of the implementation guidelines, SBP has already announced an auction of CNY loan facility, it stated.
The CSA was signed between SBP Governor Yaseen Anwar and PBoC Deputy Governor DU Jinfu in December 2011 in Islamabad.
According to a statement, the currency swap agreement between the two central banks will give a positive signal to the market on the availability of liquidity of other country’s currency in the onshore market. The arrangement will augment the pool of liquidity available to finance bilateral trade between the two countries, supplementing the already available sources of liquidity, it said.
Based on the participation of banks in the auction, SBP will draw on the swap line and provide CNY to banks in Pakistan. Banks will lend this liquidity to importers/ exporters involved in trade denominated in CNY.
At maturity, the importer/exporter will repay the foreign currency to the lending bank, which in turn will repay to the respective central bank.
In order to provide sufficient lead time for banks to arrange Chinese Yuan to importers/exporters, the first auction will be conducted on 4 June, 2013 with settlement on 13 June, 2013.
The State Bank of Pakistan directed all banks to educate their customers on the additional option of denominating their trade documents in Chinese Yuan .
The State Bank of Pakistan would encourage banks to hold sessions with local trade bodies.
All importers/ exporters are also requested to contact their respective banks for more details on how they can borrow CNY liquidity to finance bilateral trade.
The objective of the currency swap arrangement is to promote bilateral trade and investment between the two countries in the local currencies.
Since the currency swap arrangement is a bilateral financial transaction, all terms and conditions apply equally to both countries and the pricing is based on standard market benchmarks, which are widely acceptable in the respective domestic markets.
The People’s Bank has signed currency swap agreements worth up to 1.7 trillion yuan ($275 billion) with more than 20 countries, including South Korea, Australia and Russia since the global financial crisis in 2008.