Islamabad aims for financial stability and diversified funding avenues by strengthening ties with Beijing.
Key Takeaways:
i) Pakistan has formally requested an additional 10 billion yuan from China to increase its existing currency swap arrangement to 40 billion yuan.
ii) The expansion of the swap facility will allow Pakistan to utilize the Chinese currency for bilateral trade and external obligations, reducing reliance on the US dollar.
iii) Pakistan is also exploring the issuance of Panda bonds (yuan-denominated bonds) to tap into China’s large liquidity pool and potentially lower borrowing costs.
Money Matters Monitoring – An analysis by the Daily Times, titled “Economic Ties with China” and authored by Naveed Rafaqat Ahmad, highlights Pakistan’s strategic moves to deepen its economic cooperation with China. The article notes that “Pakistan has formally requested an additional 10 billion yuan (approximately USD 1.4 billion) from China, seeking to augment its existing swap arrangement from 30 billion yuan to 40 billion yuan.”
According to the Daily Times analysis, this currency swap line serves as a crucial mechanism for Pakistan, providing immediate liquidity support and enabling the settlement of bilateral trade and external obligations using the Chinese yuan instead of the US dollar. “[The currency swap line] allows Pakistan to access Chinese currency, which can be used to settle bilateral trade and service external obligations without the need for U.S. dollars,” the report states.
Furthermore, the article points out that Pakistan is considering issuing Panda bonds. “[Pakistan’s decision] to expand its financial relationship with China through an enhanced swap line and Panda bond issuance represents a strategic pivot,” the author notes. This initiative could provide Pakistan with access to one of the world’s largest pools of liquidity and potentially reduce borrowing costs due to China’s comparatively lower domestic interest rates. “With China’s domestic interest rates considerably lower than those in Western markets, Pakistan could also enjoy reduced borrowing costs, easing its interest burden in the coming years,” the Daily Times analysis suggests.
The deepening financial integration between the two nations could also lead to preferential access to Chinese markets, infrastructure funding, and technology transfers, particularly within the framework of the China-Pakistan Economic Corridor (CPEC). CPEC, a significant part of China’s Belt and Road Initiative, aims to improve Pakistan’s infrastructure and connectivity. The project includes the development of highways, railways, and energy projects intended to link China’s Xinjiang region with Pakistan’s Gwadar and Karachi ports.
While these enhanced economic ties offer potential benefits, the Daily Times article also cautions about the risks associated with increasing external debt. “[Continued accumulation of external debt, even in yuan, must be matched by economic growth and export competitiveness to avoid future repayment crises,” the author warns.
In conclusion, Pakistan’s pursuit of an expanded currency swap arrangement and the issuance of Panda bonds signify a strategic move to bolster its financial stability and diversify its funding sources through closer economic collaboration with its long-standing ally, China.
