Pakistan in talks with China on currency-swap deal

By Faisal Aziz

(Reuters) - Pakistan is in talks with China on a currency-swap deal with the aim of conserving its foreign exchange reserves, a senior Pakistani finance official said on Wednesday.

Pakistan was forced to agree to an International Monetary Fund (IMF) emergency loan of $7.6 billion in November last year to avert a balance of payments crisis and shore up its reserves, which had then fallen to $6.6 billion, largely because of a soaring import bill.

The IMF, which increased the loan to $11.3 billion in July, has disbursed more than $5 billion.

Pakistan's foreign exchange reserves have recovered some ground and stood at $13.72 billion in the week ended on Nov. 28, according to central bank data, though they are still lower than a record high of $16.5 billion in October 2007.

Under the proposed deal, Pakistani importers would be able to buy machinery and other goods from China in Pakistani rupees instead of U.S. dollars, said the official, who is familiar with the negotiations but declined to be identified.

"There have been initial talks on this proposal but the Chinese side is yet to take a decision," the official said.

"This can be a barter sort of a deal. The rupee payments made by Pakistani importers can be utilised by Chinese companies working here or by the Chinese yarn importers," he said.

Another senior government official confirmed the talks but declined to give details.

Pakistan's central bank governor had discussed the proposal with his Chinese counterpart, but it was likely that the issue would have to be taken up at other levels within the government, the first official said.

In the 2008/09 fiscal year that ended on June 30, Pakistan's imports from China were worth $2.7 billion out of total imports worth $31.6 billion, according to central bank data.

Exports to China were worth $660 million out of total exports worth $17.9 billion.

Analysts say any such agreement would help steady Pakistan's reserves and the rupee , which has weakened 5.9 percent this year after losing 22.12 percent last year, and is this week trading at 2009 lows.