Currency Swap Agreement between China and Pakistan

Currency Swap Agreement between China and Pakistan: A Strategic Move towards Economic Stability

China and Pakistan established a currency swap agreement in 2011, which aimed at promoting bilateral trade and financial cooperation. This agreement played a significant role in strengthening the economic relations between these two countries.

What is a currency swap agreement?

A currency swap agreement is a trade agreement between two countries to exchange their currencies at a predetermined exchange rate. This agreement helps promote trade and investment between countries by reducing the transaction costs and currency risks associated with international trade.

The currency swap agreement between China and Pakistan:

The currency swap agreement between China and Pakistan was signed in 2011 and was initially valued at 10 billion Chinese Yuan Renminbi (CNY) or approximately $1.5 billion. According to this agreement, the People`s Bank of China provides Pakistani banks with CNY, and in return, the State Bank of Pakistan provides Chinese banks with Pakistani Rupees (PKR). This exchange of currencies helps in eliminating the need for US dollars in the trade transactions between China and Pakistan.

The currency swap agreement was extended twice, in 2013 and 2016, with increased values of CNY 20 billion and CNY 35 billion, respectively. This reflects the growing economic cooperation and trust between the two countries.

Benefits of currency swap agreement:

The currency swap agreement between China and Pakistan has numerous benefits for both countries. Some of the significant advantages of this agreement are:

1. Promoting bilateral trade: The currency swap agreement has reduced the dependence on the US dollar for trade transactions between China and Pakistan. This has increased the volume of trade and made it easier for businesses in both countries to conduct trade.

2. Currency stability: The currency swap agreement has provided stability to the currencies of both countries. The exchange rate is predetermined, and it eliminates the volatility associated with currency fluctuations.

3. Financial integration: The currency swap agreement has increased financial integration between China and Pakistan. It has encouraged Chinese investment in Pakistan and provided the country with a stable source of funding.

4. Reducing transaction costs: The currency swap agreement has eliminated the need for companies to convert their local currencies into US dollars for international trade transactions. This has significantly reduced transaction costs and increased profitability.

Conclusion:

The currency swap agreement between China and Pakistan has proved to be a strategic move towards economic stability. It has promoted bilateral trade, financial integration, and has provided stability to the currencies of both countries. This agreement has had a positive impact on the economic development of both countries, and it is expected to continue to play a vital role in strengthening the economic ties between China and Pakistan.

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