KARACHI - The three-year bilateral Currency Swap Arrangement (CSA) between State Bank of Pakistan (SBP) and the Central Bank of Republic of Turkey (CBRT) amounting to $1 billion in equivalent local currencies is being implemented on Wednesday.

SBP has issued necessary instructions to banks for its implementation after due consultations with various stakeholders and completion of operational formalities with CBRT.

A landmark bilateral CSA was signed between SBP and CBRT by SBP Governor Yaseen Anwar and CBRT Governor Erdem in presence of Presidents of the Islamic Republic of Pakistan and the Republic of Turkey in November last year.

The objective of the currency swap is to promote bilateral trade between the two countries in the respective local currencies and any ‘other’ purpose as mutually agreed between the two central banks.

Since the CSA is a bilateral financial transaction, all terms and conditions apply equally to both countries and the pricing is based on standard market benchmarks which are widely acceptable in the respective domestic markets. CSA between the two Central Banks gives a positive signal to market on the availability of liquidity of other country’s currency in the onshore market. The arrangement will augment the pool of liquidity available to finance bilateral trade between the two countries, supplementing already available sources of liquidity.

By virtue of this arrangement, SBP will have the ability to draw on the swap line and provide Turkish Lira (TRY) to banks in Pakistan. Banks will on-lend this liquidity to importers/ exporters involved in trade denominated in TRY. At maturity, the importer/ exporter will repay the foreign currency to the lending bank, which in turn will repay to the respective central bank.

In order to ensure transparency in determination of market interest rates, the State Bank of Pakistan has decided to conduct competitive auctions of Turkish Lira (TRY) Loan Facility. All commercial banks will be allowed to take FE-25 deposits and extend FE-25 loans in Turkish Lira (TRY) for financing of Imports/ Exports in accordance with SBP’s prevailing instructions on FE-25 loans/ deposits.

On the maturity date of the letter of credit (LC), the importer will pay off the overseas supplier by borrowing in TRY. Assuming borrowing is for 6 months, the importer will save on the rupee cost and after six months the importer will buy TRY against PKR and pay off the TRY loan. Availability of onshore TRY financing will encourage importers to open TRY denominated LCs.

Once the contract is established, the exporters will borrow in TRY, sell TRY against PKR and utilise PKR for its local operations. On the maturity date of the contract, the exporters will receive TRY from the overseas buyer and payoff the TRY loan locally.  All participating banks are expected to educate their customers on the additional option of denominating their trade documents in TRY.

SBP encourages banks to hold sessions with local trade bodies. All importers/ exporters are also requested to contact their respective banks for more details on how they can borrow Turkish Lira (TRY) liquidity to finance bilateral trade.