Zamir Ahmed Awan: Currency swap deals good for developing countries

November 27 , 2018

By Zamir Ahmed Awan, a senior fellow with Center for China and Globalization(CCG)

The global trade is dependent on US dollar and whenever the US wants to punish any country, it easily imposes sanctions and freezes its accounts. An overall vulnerability has long been felt, but no country was able to challenge the dollar as an internationally acceptable currency for global trade.

In the past, few countries dared to challenge the dollar trade but eventually, they faced severe consequences like Iraq and Libya. Now many countries in the world are of the opinion to promote “currency swap” on the bilateral basis which may resolve some of their issues.

China’s growing global economic clout is out of the necessity to make the yuan a stronger international medium of exchange. China launched a pilot project back in July 2009 to use yuan for cross-border settlements. As China is the second largest economy, it does trade with almost all countries of the world and enjoys a trade surplus in its favor.

China is promoting more bilateral trade among its trade partners and according to estimates, it has one of the world’s largest diverse currency reserves in the world.

There are more than 60 countries which trade with China in its currency, RMB. In 2016, there were around 30 countries which had already signed currency swap agreements with China. The latest addition is Japan which entered into a currency swap with China recently amounting to 200 billion yuan (29 billion US dollars).

Pakistan signed a currency swap agreement with China in December 2011. Initially the agreement was for three years, subsequently renewed, and up to 10 billion yuan (1.4 billion US dollars) were available to Pakistan to swap against rupees.

In fact, the State Bank of Pakistan allows settling payments in US dollar, euro, Japanese yen, in addition to RMB. After the yuan attained the status of a global reserve currency – the third one after the US dollar and the euro – on November 30, 2016, China accelerated its efforts for greater use of its own currency for settling transactions with other nations.

Pakistan has a trade deficit of around 30 billion US dollars and needs a huge amount of dollars to maintain smooth day-to-day transactions. Out of this amount, around 46 percent is due to the trade deficit with China.

After having a currency swap agreement, dollar pressure on Pakistan may largely be reduced. It is a great relief to the fragile economy of Pakistan.

In the current geopolitical scenario, it is visible that the US is moving towards confrontation using all its elements of power, especially the economic power. This pressure can be released to some extent by having a currency swap among the trading partners on a bilateral basis. It will support the stability of the global economy and may rescue small and fragile economies.

Trading in local currencies will also weaken the unilateral sanctions of global powers, especially, in the case of Iran, where the US unilaterally withdrew from the JCPOA. The JCPOA was a hard-earned agreement signed by the permanent members of the United Nations Security Council, namely China, France, Russia, the UK and the US plus Germany (P5+1). If the US doesn’t want to trade with Iran anymore, then there should be other mechanisms in place for the bilateral trade to continue.

Furthermore, it is strongly suggested to establish an Asian Monetary Fund or something similar to the International Monetary Fund (IMF), with the aim to support small and weak economies, especially in Asia, Africa, and Latin and South America. The fund should help countries irrespective of their regional alliances and should purely be given on need basis. The present IMF regime has a clear bias towards countries not in conformity with US foreign policy.

The setup of an Asian Infrastructure Investment Bank (AIIB) is a great step for the developing countries. The AIIB establishment is a positive step in the right direction and has been producing the desired results. The AIIB is a Chinese initiative but it has provided funds for infrastructure projects in many developing countries in Asia as well as in Africa. Even India is a beneficiary of AIIB, and this is a perfect example of Asian cooperation beyond political differences.

China has developed to a stage where it can play a leading role in global “peace, stability and development.” The developing world should join China’s Belt and Road Initiative to achieve this endeavor.

About Author 

Zamir Ahmed Awan is a senior fellow with Center for China and Globalization(CCG) and a sinologist at the National University of Sciences and Technology.