Behind Pakistan's $10 Billion Request from the US
TEHRAN (Defapress) - Pakistan has requested a $10 billion currency swap facility from the U.S. Treasury's Exchange Stabilization Fund. This request comes at a notable time; Iran's regional war is underway, Pakistan has become an important channel for diplomacy between Washington and Tehran, and Islamabad is once again attempting to monetize its geopolitical importance.
The details of this proposal are not yet finalized. Its legal structure, pricing, maturity, conditions, and permitted uses have not been publicly disclosed. It may not be approved, and even if approved, it may never be drawn upon. These considerations are important, but they cannot diminish the political significance of this request. On the contrary, the potential existence of such a facility tells us something about how money and power travel together.
Pakistan, particularly through its currency swap with China, has extensive experience receiving financial support from superpowers. Securing a U.S. facility adds another layer to this experience, placing Pakistan at the intersection of two competing monetary networks. Beijing’s swap lines support trade in yuan, assist in internationalizing the currency, and reinforce China's political influence. Washington’s provision of dollar liquidity preserves the dollar-centric financial order while rewarding countries critical to U.S. economic and strategic interests.
A bilateral currency swap agreement, often called a "swap line," is a standing arrangement between two central banks, the public institutions managing a nation's currencies and foreign exchange reserves. "Bilateral" means it involves two parties. "Swap" refers to the temporary exchange of currencies, while "line" represents the maximum amount available. Therefore, signing a $10 billion line does not mean $10 billion has been delivered or immediately added to a country's usable reserves; rather, it means the recipient has the right to request funds under agreed conditions.
If the line is drawn upon, the transaction occurs in two stages. Suppose the State Bank of Pakistan needs dollars. It transfers an agreed amount of rupees to the providing institution and receives dollars in return at an exchange rate determined by the agreement. Complying with the facility's rules, those dollars can be used to supply domestic banks, pay for essential imports, meet foreign obligations, or calm a disorderly foreign exchange market.
Upon reaching maturity, the transaction is reversed. Pakistan returns the dollars, gets its rupees back, and pays any accrued interest or fees. Therefore, a swap is neither a grant nor free money. Once drawn, it creates a debt that must be repaid. Its purpose is to bridge a temporary shortage of usable foreign exchange and prevent that shortage from turning into a broader financial crisis. The exact maturity, cost, permitted uses, and renewal conditions vary from one agreement to another.
The reported U.S. proposal is institutionally different. Pakistan is seeking support from the Treasury's Exchange Stabilization Fund, not a Federal Reserve swap line. Thus, it should not be portrayed as Pakistan joining the Federal Reserve's established network for central bank liquidity arrangements. Until the terms of this swap line are made public, we cannot know whether it will function like a short-term currency swap, a balance-of-payments backstop, or a stabilization facility similar to a loan.
Studying the history of central bank swaps is relevant to this debate because it reveals the policies governing access to emergency liquidity. During the 2008 global financial crisis, the Federal Reserve offered swap lines to only four emerging markets: Brazil, Mexico, Singapore, and South Korea, while other requests were rejected. Aditi Sahasrabuddhe, a political scientist at Brown University, argues that the selection of these four countries reflected important points. The Federal Reserve supported economies that were financially open, strategically useful, and aligned with U.S. preferences in global economic governance. When economic justification was ambiguous, political considerations helped determine who gained access.
Another study by Sahasrabuddhe shows that interpersonal trust among central bankers also influenced the formation of this network. Strong relationships brought access to larger or less restrictive facilities; countries outside those circles had to rely on costlier alternatives. In other words, the global financial safety net is neither universal nor politically neutral; rather, it is, in part, a hierarchy of relationships.
Now, history repeats itself; Washington does not take on exceptional financial commitments simply because a country asks. If Pakistan is offered a large stabilization facility, it would be logical to interpret it as a sign that the U.S. has plans for Pakistan's continued cooperation. Swap lines are often compared to plumbing: technical arrangements that keep currencies and credit flowing, but it is the provider that decides where to install the pipes.
For the U.S., supplying dollars abroad helps maintain the system built around the dollar. The Federal Reserve's crisis facilities protect both U.S. interests and foreign recipients. When dollars become scarce, banks and borrowers overseas may be forced to sell assets, default on dollar obligations, or sharply drive up the price of the dollar. Providing liquidity curbs these pressures, protects internationalized U.S. financial institutions, and reinforces the expectation that in a crisis, the world still relies on and depends on the U.S.
China is working to build a portion of this capacity for itself. Following the global financial crisis, the People's Bank of China rapidly expanded its swap network, contributing to a much broader layer of the global financial system. By the end of 2020, an IMF study counted 91 participants and approximately $1.9 trillion in declared capacity across the global bilateral swap network. China was one of the primary forces behind this expansion. Chinese officials have identified three overlapping objectives for providing Chinese facilities: promoting the internationalization of the yuan, facilitating trade and investment, and supplying yuan liquidity for financial stability. Some Chinese swaps, including Pakistan's, have also been used to manage balance-of-payments pressures.
A currency becomes internationalized not merely because a government declares it so, but because foreign firms, banks, and governments can acquire and use it. Every trade payment settled in yuan, every reserve manager willing to hold it, and every central bank connected to the People's Bank of China reduces reliance on the dollar. China's swaps create the institutional channels through which this shift can occur.
Beijing also builds political relationships through the expansion of the yuan. Research conducted by Qi Liu, Jun Peng, and James Raymond Vreeland examined 38 countries that signed swap agreements with China. In this study, the authors found that after signing a bilateral currency swap agreement, there is a short-term shift toward China's foreign policy positions, with stronger and more lasting effects among financially vulnerable countries and governments already drawn to Chinese leadership. This does not mean every swap buys a vote. Pakistan itself did not shift its positions following its currency swap in this study; nevertheless, the general conclusion is significant: access to liquidity can alter a state's incentives, particularly when alternative resources are scarce.
Thus, the U.S. and China pursue different yet comparable forms of monetary power. China wants to make the yuan more usable and integrate its partners into a China-centric network. The U.S. wants to preserve the central role of the dollar and maintain its influence over strategically vital countries. A swap may appear economic on the surface, but in essence, access and expectations regarding future cooperation are also determined.
Pakistan's request to the U.S. cannot be separated from Iran's regional war. Islamabad has acted as a mediator and a point of contact for U.S.-Iran communications, giving it a role that neither Washington nor Tehran can easily ignore. The geography of this mediation connects South Asia, China, Iran, Afghanistan, and the Arabian Sea. Pakistan's military ties with Persian Gulf states, its long-standing partnership with China, and its ability to communicate across rival camps make it unusually useful during a regional conflict.
For Washington, a financially stable and cooperative Pakistan could help maintain diplomacy, limit broader regional escalation, and prevent Beijing from becoming Islamabad's sole reliable source of emergency support. A Treasury facility also serves as a reminder to Pakistani leadership that access to the dollar system can yield benefits that the yuan cannot yet fully match. The strategic message of this swap would be clear: Pakistan remains in the U.S. orbit.
The appeal of this currency swap for Pakistan is equally clear. A large dollar backstop could calm markets, reduce fears of a sudden external financing crisis, and give state banks more room to manage volatility. Pakistan is simultaneously reducing short-term external debt, seeking longer-maturity financing, and preparing for a return to international capital markets. A credible backstop could bolster these efforts by reducing rollover risk and reassuring lenders that Pakistan can meet its short-term dollar obligations.
The timing of this swap supports geopolitical interpretations, but a single swap is not enough to prove the claim. There is no evidence showing that Washington offered $10 billion in exchange for a specific Pakistani position on Iran, China, or any other issue. Furthermore, given its history, Pakistan must remain cautious regarding U.S. expectations. U.S. interest in various countries has repeatedly surged and faded alongside regional wars and crises.
Islamabad must also resist the temptation to turn its mediating role into participation in the war. Islamabad's economic interests lie in de-escalation. Conflict with neighboring Iran presents severe security risks, disrupts energy and trade, strains domestic cohesion, and jeopardizes Pakistan's ability to work with China and the Gulf states. The value Pakistan currently offers to Washington is precisely its ability to communicate across dividing lines. Sacrificing such a position would destroy the very asset it is trying to monetize.
The financial benefits of swap lines are real, but they are easily exaggerated. Currency facilities are merely conditional financing that, once drawn, create a future repayment obligation. Frequent renewals can make a short-term liquidity tool resemble long-term debt while allowing governments to advertise stronger gross reserves than their net position warrants.
China's experience illustrates the risks of these facilities. Pakistan signed its swap agreement with China in 2011 and began drawing on it in 2013. The IMF found that Pakistan and Mongolia accounted for a major portion of the approximately $8 billion outstanding under China's overseas swaps at the end of 2020. This arrangement gave Pakistan breathing room and supported the use of regional currencies in trade. However, the liquidity was not equivalent to unrestricted dollars.
The yuan cannot automatically service dollar sovereign debts. Conversion may entail additional costs, exchange rate risks, and the need for negotiation. Crucial terms governing drawdowns and convertibility are often vague. In Pakistan's case, experience showed that repaying in yuan amidst a depreciating rupee could become costly. Authors found that Pakistan's 2011 signature was initially accompanied by a reduction in bond spreads (deposits), but the reassuring effect of bilateral currency swap agreements with China generally weakened over time as investors became aware of their operational limitations.
This is not an argument against Chinese facilities. It is an argument against the process of currency swaps and the facilities resulting from them. Yuan liquidity is primarily useful for settling eligible imports from China, supporting bilateral trade, and reducing the need to supply dollars for those transactions. Dollar liquidity is useful for dollar debts and stabilizing markets that continue to price risk in dollars. Pakistan can benefit from both, provided it does not pretend the currencies are fungible or that either arrangement fixes the structural weaknesses of these swaps.
The IMF study reaches the same reasonable conclusion: currency swap lines are now a valuable part of the global financial safety net, but there is little evidence that they automatically improve macroeconomic policies. They may even delay economic growth when governments use temporary liquidity to postpone necessary reforms.
The proposed $10 billion U.S. facility could be useful for Islamabad. Pakistan's established currency swap relationship with China is also useful. But it will not stop Pakistan's vicious cycle of statecraft, in which the country pursues another temporary gain in every geopolitical crisis. Islamabad continues to sell its foreign policy to the highest bidder, and that is the worst news for the people of Pakistan.
