THE rupee-yuan swap agreement signed six years back has once again come under the spotlight as Pakistan`s external-sector pressures mount, owing primarily to the country`s surging trade deficit with China.

The bilateral free trade pact, inked a decade ago, is also being reviewed as our exports to the neighbouring state decline.

State Bank of Pakistan`s (SBP) figures show that China`s share in our total imports 22 per cent last fiscal year-isthehighestamong Pakistan`s trading par1ners, making it `critical` to curb the huge trade imbalance.

In their study `Dynamics of Pakistan`s Trade Balance with China`, SBP`s researchers Junaid Kamal and Manzoor Hussain Malik note that many Pakistani items with a better export potential deserve a lower tariff than provided in the existing free trade pact. They have also identified goods denied the same tariff concessions as granted by Beijing to the East Asia.

A part of the CPEC-related imports is funded by financial inflows from China. According to the SBP, private firms operating in the power and construction sectors have secured sizeable levels of financing from their Chinese sponsors and banks both in the shape of equity and commercial loans.

In the 2016-17 fiscal year, the financial transactions comprised the following: net foreign direct investment (FDI) of $1.186 billion, portfolio investment of $48 million and gross official bilateral loan disbursement of $1.594bn.

Chinese banks and developmentfinancial institutions are also extending foreign exchange support to the Pakistan government and Chinese banks operating in Pakistan. A Chinese foreign ministry spokesman recently said that bilateral monetary cooperation has been deepening since Pakistan signed the bilateral currency-swap agreement.

The expanding volume of bilateral trade with China, which exceeds $15 billion in the total foreign trade ofRs72bn according to the Pakistan Bureau of Statistics, offers some opportunity to renew the rupeeyuan swap line arrangement.

The rupee-yuan swap agreement, inked on Dec 23, 2011, became effective on May 7, 2013.

According to a media report, it was rarely used by traders, and the central bank availed only a one-ff $600 million facility for balance of payments support.

The SBP has reminded private and public sectors in Pakistan and China that they are `free to choose yuan for bilateral trade and invest-ment activities`. Under the swap line, the SBP can take a loan of 10bn yuan from the Peoples Bank of China and can return the loan by giving Rs140bn.The banks have been allowed to accept deposits and provide investment loans in yuan. The public sector in both countries can take the lead to avail the facility.

There is also a marked shift being observed in Pakistan`s tradetowards regional cooperation because of CPEC and the potential that rising Asia offers. As the dollar is deeply entrenched in the local currency market, directional change has to be encouraged and sparingly enforced by regulatory measures.

On the global plane, an evolving multiple currency system is replacing the dollar, though it is still the main anchor of a faltering international financial system. Crosscurrency swaps are being increasingly used to offset both exchange rate and interest rate risks with daily global transactions in the range of$50bn to $60bn.

Aware of the changing global trade developments and to cut transactional costs, the central bank, through a circular in 2012, allowed the authorised dealers to open foreign currency accounts and extend trade loans under its specified scheme in Japanese yen, UAE dirham, Saudi riyal, Chinese yuan, Turkish lira, US dollar, pound sterling, Canadian dollar, etc.

On Jan 1, it decided to restrict imports of cash dollars from Dubai by exchange companies to 35pc of the total imports during a month.

While the SBP did not clarify how the rest of the 65pc of imports would be made, Forex Association of Pakistan president Malik Bostan, who was among those dealers taken into confidence by the authorities before announcing the decision, said: `The cost of physical import of dollars against the export of foreign currencies is high due to insurance and other expenses.

Another currency trader says, `We will again depend largely on banks to provide us with dollars.

The central bank reversed the decision on Jan 9 as the rupee`s exchange rate depreciated in the open market because of shortage of dollars, and also owing to mounting pressure of currency dealers.

But in the absence of a big push for raising Pakistan`s exports to the Chinese market, there is a risk that a galloping trade deficit, funded by debt and FDI, may continue to add to the country`s externalsector woes. m jawaidbokhari2016@gmail.com