China and Pakistan’s Currency Swap Deal Extended

China has decided to extend its currency swap agreement with Pakistan for an additional three years. The agreement was first signed in 2011 and this extension of the currency swap agreement comes at a good time for Pakistani as the country is suffering from alarmingly low levels of dollars in its reserve.

Along with the extension, Beijing has given a $1 billion loan to Islamabad to assist with its crisis.

The People's Bank of China announced that it has extended its currency swap agreement with the State Bank of Pakistan for another three years.

Currently, the size of the swap is set at 20 billion yuan, the equivalent of $3.1 billion, on the side of the Chinese while the Pakistanis are set to exchange 351 billion Pakistani rupees.

Both parties believe that this swap will help in developing the economy of both countries and encourage bilateral trade between the two. The swap is already set for a three-year extension and can be further extended if both parties consent. A currency swap deal works by allowing both parties to exchange currencies with one another. This will help in trade deals with each other and can provide more liquidity for the financial markets.

In a statement, Tariq Bajwa, the governor of the State Bank of Pakistan said The money strengthens the financial, political and military ties between the two countries. Chinese commercial banks are awash with liquidity

Pakistan Needs Forex Boost

Pakistan's foreign reserve crisis got a lot of attention earlier this month. In April 2017, Pakistan had foreign exchange reserves of $18.1 billion. However, since then things have gone downhill and foreign reserves now stand at $10.8 billion. This would only be enough to support two months of imports – which is why the China deal is so important. It also helps that Pakistan imports $12 billion a year from China.

The $1 billion loan from China will stop Pakistan from seeking additional financial help from the International Monetary Fund (IMF). This move favors China since it extends its influence over the region. Further details are unavailable on the loans that are now part of the China-Pakistan Economic Cooperation (CPEC) project, which is already investing $60 billion in the region.

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This is not the first time that Pakistan has borrowed from China. Pakistan has borrowed around $1.2 billion from Chinese banks since April last year. There is even a possibility of more loans to follow.

With the currency swap deal and the loans, Pakistan will have less dependence on the dollar, something that China encourages as it flexes its muscle in the region.

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