(Yicai Global) May 25 -- China has doubled the size of a currency swap agreement with Pakistan by adding CNY10 billion (USD1.57 billion) to the deal, amid reports that Beijing has given a USD1 billion loan to Islamabad to help it avert a foreign currency crisis.
The scale of the currency swap contract is CNY20 billion (USD3.1 billion) and it is valid for three years, but can be extended for longer, said the People’s Bank of China in a statement.
"The money strengthens the financial, political and military ties between the two countries," the State Bank of Pakistan's Governor Tariq Bajwa told the Financial Times. "Chinese commercial banks are awash with liquidity."
Pakistan's foreign exchange reserves have dropped from USD18.1 billion in April last year to USD10.8 billion in May a year after, official data shows. Before the USD1 billion loan in April this year, Pakistan had borrowed almost USD1.2 billion from Chinese banks in the period of a year, while Pakistani finance ministry said it is avoiding borrowing from the International Monetary Fund. The IMF discloses the terms of such lending but Chinese banks have remained secretive about the contract terms.
The Asian country's public debt to gross domestic product ratio is estimated to peak to 70 percent by the end of its current fiscal year in June, which would be the highest level in the past 15 years.
One of Pakistan's money-burners is the 15-year China-Pakistan Economic Corridor, part of China’s Belt and Road initiative, which has started upgrading the southern Asian nation's infrastructure. The project begun with a USD46 billion initial investment but that ballooned to USD62 billion in April last year when China injected additional funds into the CPEC.
A currency swap deal allows two institutions to exchange payments in one currency for equivalent amounts in the other to facilitate bilateral trade settlements and provide liquidity support to financial markets.
Editors: Emmi Laine, William Clegg