The central bank on Tuesday said trade in local currencies between Pakistan and China is already in place and businesses from both the countries are free to choose Yuan for bilateral trade and investments.
“The State Bank of Pakistan, in the capacity of the policy maker of financial and currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in CNY (Chinese Yuan),” the central bank said in a statement. “Both public and private sector enterprises (i.e. both Pakistanis and Chinese) are free to choose CNY for bilateral trade and investment activities.”
The central bank’s statement was apparently a response to Minister for Planning Ahsan Iqbal’s media briefing last month in which he said the government was considering a proposal to replace dollar with Yuan in bilateral trade with China. SBP said Chinese Yuan is an approved foreign currency for denominating foreign currency transactions in Pakistan as per current foreign exchange regulations.
“Considering the recent local and global economic developments, particularly with the growing size of trade and investment with China under CPEC (China-Pakistan Economic Corridor), SBP foresees that CNY denominated trade with China will increase significantly, going forward; and will yield long term benefits for both the countries,” the central bank said.
The central bank said it has already put in place the required regulatory framework, which facilitates use of CNY in trade and investment transactions, such as opening of letter of credits and availing financing facilities in CNY.
Bankers are wary of bilateral trade in Yuan in view of trade tilted in favour of China.
“I don’t see this idea would be feasible as currently the trade balance between the two countries is not in the favour of Pakistan,” a senior banker said.
Pakistan’s bilateral trade deficit with China widened to $12 billion in the fiscal year of 2016/17 from $4 billion in 2012/13. Pakistan’s imports from China jumped to $14.13 billion in FY2017 from $12.11 billion in the previous year, while its exports stood at $1.5 billion compared with $1.7 billion. Economists said the implementation of trade in Yuan would ease burden on foreign exchange reserves.
“We see the proposal to settle China-Pakistan trade in bilateral currencies in the context of the broader economic and financial cooperation between the two countries announced earlier this month,” Bilal Khan, a senior economist at Standard Chartered Bank said.
“A public discussion of financing – including potential for expanding the bilateral swap line – had so far been missing in the China-Pakistan Economic Corridor,” Khan added.
A currency swap agreement between the two countries was signed in 2011. The swap arrangement became operational in 2013 with a size of CNY 10 billion and Rs140 billion ($1.5 billion).
The objective is to promote bilateral trade and investment between the two countries in the respective local currencies.
CNY is at par with other international currencies such as dollar, Euro and Japanese yen in terms of regulations in Pakistan.
SBP has already taken a series of steps to promote use of CNY in Pakistan for bilateral trade and investment with China after signing currency swap agreement. SBP allowed banks to accept CNY deposits and give CNY trade loans.
The central bank put in place the loan mechanism for banks to get the CNY financing from SBP for onward lending to importers and exporters having underlying trade transactions denominated in CNY.
“Industrial and Commercial Bank of China Limited Pakistan has been allowed to establish a local CNY settlement and clearing setup in Pakistan enabling it to open CNY accounts of the banks operating in Pakistan and to facilitate settlement of CNY based transactions such as remittance to/from China,” the central bank said.
“With the opening of Bank of China in Pakistan, the access to onshore Chinese markets will strengthen further. Apart from the above, several banks in Pakistan maintain onshore CNY nostro accounts.”
Khan termed the move as a welcome development. “While the plan’s strategic ambition to enhance financial cooperation is welcome, we will be watching for details on the specific terms of such agreements – and, crucially, their timing – to assess the near-term implications for Pakistan’s balance of payments,” he added.
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