CURRENCY SWAP AGREEMENT

 INTERVIEW IN PAKISTAN AND GULF ECONOMIST
 (Feb 27-Mar 04-2012)

Majyd Aziz (Former President KCCI)

Q. No. 01: Tell me something about yourself, please?

I belong to a business family that is involved in value-added textile suitings and shirtings and also in value added menswear. Our major involvement is in coal imports as we have a formidable share of the imported coal market that we supply to large cement mills. We are also the largest exporters of chrome ore from Pakistan. We are also the largest stevedores and cargo handling company in Pakistan primarily handling bulk and break-bulk cargo at both Karachi Port and Port Qasim.

I am active in trade associations, being Former President of Karachi Chamber of Commerce and Industry, Former Chairman of SITE Association of Industry, and am Founder of Pakistan-Japan, Pakistan-Sri Lanka, and Pakistan-Indonesia Business Forums. Incidentally, I am also Chairman of SME Bank Ltd, which is a government-owned commercial bank.

Q. No. 02: Pakistan and Turkish Central Banks signed a bilateral Currency Swap Arrangement (CSA) at a ceremony held in Istanbul in the presence of President Asif Ali Zardari and Turkish President Abdullah Gul. How would you comment on it?

Before answering this question, I would first give a short background of the imperative need for Currency Swap Agreements in Pakistan’s case. President Asif Ali Zardari has been very pro-active in convincing foreign countries to initial Currency Swap Agreements as it is in not only in the larger interest of Pakistan but it would enable SBP to conserve scarce foreign exchange reserves, especially in these tough times. Although SBP has, what is termed as the highest Forex Reserve figures in its kitty, the bare fact is that the burgeoning import bill, the dwindling value of the Rupee, the inflationary trend, the huge expenses on the Global War on Terror as well as rehabilitation of the flood affected victims, etc have put extreme pressure on the economy. Moreover, the inability of the government to adhere to the conditionalities of IMF and other international financing institutions has necessitated a revisit of the country’s Forex options.

The two Presidents took favorable advantage of the close and time-tested and agreed to enter into this agreement. The agreement in Pakistan Rupee / Turkish Lira amounts to $1 billion in equivalent local currencies while the tenor of the agreement is three years. It would definitely enhance Pakistan’s share of the Turkish market and at the same time, Pakistani importers, especially industrialists, would be encouraged to source excellent quality raw material and machinery from Turkey.

Q. No. 03: Do you think Currency Swap Agreement could enhance bilateral trade? Your views:

CSA has been recognized as a viable option in enhancing global trade. Various countries have opted for this agreement including countries that have large trade figures. Pakistan is achieving this status after a long time and in fact, it is to the credit of China that Pakistan is now in a position to offer a precedent to other nations. The deal with Turkey manifests this new thinking. Credit should also be given to the new State Bank of Pakistan, Governor Yaseen Anwer, for spearheading this process. Pakistan strives to be a formidable global trader and it is imperative that all options, that are doable from Pakistan’s point of view, are explored and achieved. It would also provide some breathing space to Pakistani exporters and importers who would be in a position to deal away from the Dollar or the Euro.

Q. No. 04: The Currency Swap Agreement between any two central banks would give positive signal to the market on availability of liquidity of the other country`s currency on the onshore market. Your views:

As stated above, the Central Banks would be able to induce substantial bilateral trade between Pakistan and the countries that have accepted and signed the CSA. It can be stated that CSA has two main advantages. Firstly To secure cheaper debt by borrowing at the best available rate regardless of currency and swapping for debt in desired currency using a back-to-back-loan and secondly, to hedge against or reduce exposure to exchange rate fluctuations. It is to be noted that while Central Bank liquidity or currency swaps are structurally the same, CSA are commercial transactions driven by comparative advantage, while central Bank liquidity swaps are emergency loans to overseas markets.

Q. No. 05 : The trend of currency swap is rising among developing nations. South Korea signed an agreement with Japan and China to enhance size of the agreement for currency swap. Your comments:

China has multiple year CSA with many ASEAN countries such as South Korea, Indonesia, Malaysia, and Singapore, while it has also signed CSA with Argentina, Iceland, and of course, with Pakistan. Yes, South Korea and Japan also have a CSA. It is in the long-term interest of developing countries to adopt this option as it would lead to better and fruitful management of foreign exchange resources. However, it must be stated that the cost of CSA is higher but the advantages outweigh the negative impact.

Q. No. 06: The Chinese Central Bank agreed with SBP to swap 10 billion Yuan ($1.6 billion) for 140 billion Pakistani Rupees. Your comments:

This agreement is a trailblazer initiative and signing of CSA with China is in the larger interest of Pakistan. The Chinese and Pakistani Presidents have envisaged bilateral trade to exceed US$ 15 billion within a few years. In 2010-11, bilateral trade was US$ 5.789 billion consisting of Chinese imports into Pakistan of US$ 4.144 and exports from Pakistan of about US$ 1.645 billion. Therefore, it is essential for Pakistan to enter into this agreement. Pakistan needs critical mass in financing what would most probably be huge imports from across the border. The bilateral Currency Swap Agreement signifying the limits of 10 billion Yuan and Rs 140 billion (about US$ 700 million ) is basically for the objectives of further promoting bilateral trade and investment and strengthening financial cooperation. Pakistan must continue to emphasize the essential need for CSA with other foreign trading partners as there is this positive hope that it would be beneficial for the country’s trade, employment, and economic prosperity.