Pakistan’s Currency Swap Agreement with China
Yaseen Anwar, who was Governor of the State Bank of Pakistan until January 31, 2014, gives his views about Pakistan’s Currency Swap Agreement (CSA) with China. The agreement benefited Pakistan in a big way as the country took particular advantage of China
The Currency Swap Agreement with China represented a watershed event. Without it, Pakistan would have faced a balance of payments crisis in 2013 as its economy faced one of its greatest challenges in its history. Very few people, even in the highest echelons of the government, realized the severity of what the country potentially faced. Yaseen Anwar, then Governor of the State Bank of Pakistan, negotiated and signed the CSA with China. It must be said that the Peoples Bank of China (PBOC) was pivotal in preventing Pakistan from facing the crisis.
This was in the backdrop of the global financial crisis that led to deleveraging in Europe and the U.S. and an unprecedented end in March 2013 of the PPP government which had completed five years.
After the caretaker regime, which came in March 2013 for three months, a new government was installed in the first week of June. In January 2013, Pakistan’s foreign exchange reserves stood at only $8 billion while heavy monthly debt repayments were scheduled to be made to the IMF and other multilateral agencies until November 2013. This was on top of a current account deficit of around $2 billion for fiscal year 2013. The war on the Afghanistan border was also continuing and incursions were being made by the Taliban. Considerable economic uncertainty emanated from these events. The only continuity in terms of economic management during 2013 was evident at the State Bank of Pakistan.
Given this volatile backdrop, the key objective was to navigate the country’s balance of payments in such a manner as to build a positive market sentiment by July/August towards a ‘planned’ signing of a new IMF facility and, at the same time, to ensure a stable currency that was hovering slightly below Rs 100 against the US dollar at the start of 2013. Analysts and bankers had forecast that the PKR would move up to Rs. 115 by July. Some had forecast an even higher figure. While the primary purpose of the $1.5 billion CSA with China was intended to stimulate trade between the two countries by settling payments in local currency, it also included a balance of payments liquidity support line that represented a strategic arsenal that was to be deployed only when needed. Its implementation timeline was very carefully choreographed by the SBP to manage ‘market sentiment.’
To cushion major foreign exchange outflows in May and July of 2013 would have adversely shaken market sentiment. The SBP drew a total of $1.2 billion during this period under the CSA that represented a significant portion of a total of $1.9 billion overall inflow secured from China in 2013.
This substantial inflow not only forestalled the potential balance of payments crisis that was forecast in March/April by some pundits but also kept the Pakistani rupee below Rs. 100 until July and improved market sentiment in August through signing of an LOI for a new $6.7 billion IMF facility, thereby opening the floodgates of the otherwise stalled World Bank and Asian Development Bank financing. At the same time, Moody’s upgraded Pakistan’s rating to ‘stable outlook’. Thus the CSA with China and its implementation was instrumental in helping Pakistan ‘weather’ a storm when critically needed.
Going forward, the economic collaboration and the work already undertaken to promote the Pakistan-China economic corridor can provide the much needed synergistic benefits that could unleash the growth potential of Pakistan, improve employment and make further progress in the much needed inclusive growth. Notwithstanding the economic uncertainties that surround Pakistan and the world, the country can capitalize on the CSA to support the economic corridor. This can be done only if its technical application is properly understood and the overall spirit recognized under which it was intended as an instrument to boost trade and investment between the two countries.
To ensure future success and support from China’s leadership, Pakistan must display prudent and well-coordinated management of its financial affairs that reflect good corporate governance standards. It should build its capacity resources and follow a strict financial discipline across the board as required under the IMF facility. It is such discipline that has elevated China to the now exalted position of being the second largest economy in the world.
Yaseen Anwar is an experienced global banker and is currently a Senior Advisor to the Industrial & Commercial Bank of China (ICBC), Singapore. He served as the Governor of the State Bank of Pakistan from October 2011 to January 2014. He was also on the Boards of SBP, Pakistan Security Printing Corporation (PSPC), Policy Board of SECP, Board of NIBAF and SAARC Payments Council Board. Anwar has worked at JPMorgan Chase, Bank of America and Merrill Lynch in New York, London and Paris.