China’s Loan to Pakistan Paves the Way for Trade in Domestic Currencies in Big Blow to IMF

China has agreed to double its existing credit agreement with Pakistan from 10 billion to 20 billion Yuan in a move that will see fresh cash injections into Pakistan’s economy. This will not only help Pakistan to avoid another one-sided loan agreement with the International Monetary Fund (IMF), but will in the long term help Pakistan to begin trading with China in domestic currencies. For a country as large as Pakistan and one that has had traditionally close (however lopsided) relations with the US, commencing trade in domestic currencies represents a notable blow to the hegemonic power of the US Dollar.

According to Tariq Bajwa, the current Governor of the State Bank of Pakistan,

“The money strengthens the financial, political and military ties between the two countries”.

As China is already the major infrastructural investor in Pakistan, the loan is in reality a further investment into the country as Beijing and Islamabad are both aware that common developmental goals in south Asia will mean that the money will likely be spent on crucial projects which aim to benefit both countries according to the win-win model of Chinese President Xi Jinping, which Pakistan has warmly embraced.

China is also aware that as further physical and political progress is made in respect of the China-Pakistan Economic Corridor (CPEC), that Pakistan’s economy is set to experience a renaissance as a major hub of trans-Asian, Eurasian and Asia-Africa trade. In this sense, far from merely “propping up” Pakistan’s economy, China is making a long-term investment that will likely pay large dividends to both sides in the near future.

In terms of setting developmental targets, working with China is also preferable from Islamabad’s perspective vis-a-vis working with the west-leaning IMF. This is especially crucial at a time when the US under Donald Trump has sought to financially blacklist Pakistan over outlandish accusations that Pakistan is harbours terrorism when in reality it is Pakistan that is among the world’s biggest victims of terrorism, not least from America’s neighbouring war in Afghanistan.

According to the agreement, the line of credit will allow Pakistan and China to freely convert their currencies which also strengthens the future of the Yuan as the world’s next global reserve currency while giving Pakistan exchange rates that are favourable vis-a-vis the US Dollar.

Taken holistically, the move is one which is set to pave the way for an international trading environment along the New Silk Road where exchanges in Dollars give way to exchanges in Yuan. In this sense, both Pakistan and China have charted a course which will ultimately become the new reality of both bilateral and multilateral trade in the 21st century.

 


 

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