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

Southasia - - OPINION -

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.

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