Posted on May 30, 2018 at 03:00 PM
Pakistan and China agreed to actively use bilateral currencies for the settlement and promotion of bilateral investment and trade. Pakistan Central Bank "The State Bank of Pakistan" has allowed the Chinese Yuan for bilateral trade between Pakistan and China. It is an initial step which will replace and devalue the US dollar for the transactions in strategic China Pakistan Economic Corridor (CPEC) projects.
The implementation of Yuan between Pakistan and China means it will replace the US dollar for transactions in the USD 64 billion China Pakistan Economic Corridor projects. This step defines the aim to promote monetary cooperation between Pakistan, China and Central banks through the implementation of existing currency and to expand the amount of currency and scope of bilateral currency swap boosting the trade and domestic banks.
It means Chinese and Pakistani banks will be able to start an open import letter of credit in rupees and Yuan. As well Pakistan will be able to pay for trade between two countries in Yuan rather than in dollar. On the other scenario, Chinese companies investing in CPEC projects of Pakistan will trade in Yuan and remit back their profits and dividends in Yuan instead of the dollar.
The fact is that dollar will be the most dominating medium of exchange in the future. But if Pakistan and China prioritize to set bilateral trade between two countries which will reduce the dependence on the dollar.
There is a growing trend towards promoting the use of local currencies to manage transactions between two or more countries. As Russia and Turkey have taken a step to use their local currencies instead of the dollar. As well as the central banks of Malaysia, Indonesia and Thailand introduced a trade framework for the direct settlement of transactions in local currencies.
And it will be more beneficial for Pakistan and China under CPEC.
In the financial year of 2017, Pakistan exported services and goods with the worth of USD 1.62 billion and imports in the same year from China were 10.57 billion which shows a huge imbalance. Pakistan and China have not finalised the free trade agreement(FTA) yet which will benefit Pakistan more due to huge trade deficits. The scheme was developed into a full-fledged framework in which thousands of Chinese Companies make their transactions through Yuan with their partners in HongKong and SouthEast Asian Nations.
Yuan got the status of "Global Reserve Currency" the third most effective currency after the Euro and US dollar. So, China boosted up its efforts for international trade and use of Yuan for transactions with other nations.
For Pakistan, it is critically important the Yuan-Rupee settlement of trade because it will reduce our needs and direct effect on debts on Pakistan and consumption of dollar.
Initially, if we financed the only 25pc of imports from China our US dollar requirements will be directly declined by Us $2.5 dollar within a year.
The state bank of Pakistan needs to define a framework for this purpose and there is a bigger challenge for bankers to explain to businessman how the rupee-yuan settlement of transactions would work and how business would benefit from it. As well as State Bank of Pakistan stated that SBP invited bids across Pakistan for buying Yuan in 2013 by local banks but unfortunately there was no positive response.
But its 2018, megaprojects are completed and things are changed. Now our country really needs Yuan to step in Pakistan so the growth in imports-exports and other foreign currency obligations does not create an unmanageable need for the dollar.
Once the strong developments are made the free flow of Capital and transfer of funds between Pakistan and China will become more easier.