Bilateral Currency Swap Agreement between China and Pakistan: Expected Impact through CPEC

A bilateral Currency Swap agreement can be defined as an agreement between the two central banks for the exchange of a cash flow in one currency against the cash flow in another currency according to predetermined terms and conditions. The maturity period of the Currency swap agreements is negotiable for a short period (Up to one year) to the long term that can be between 3-10 years by making it a very elastic mode of foreign exchange. The interest rates attached to these agreements can be fixed or floating and are generally expressed as inter-bank lending rate such as “benchmark rate” plus or minus a certain number of points3.

Bilateral Currency Swaps provide a feasible mode of hedging against exchange rate fluctuations. It enables the country to remain comparatively secure at the time of financial distress by managing the liquidity shortages.1 Swap Agreements offer the opportunity to acquire foreign currency loans at a competitive and a better interest rate as compare to the direct borrowing in a foreign market. It allows the use of local currency in settlement of cross border transactions and reduces the dependence on a specific currency like US dollar4. Thirty-six countries have signed the bilateral currency swap agreements with China to get supported in international trade and investments. This has helped renminbi to receive the status of international currency5.