In this photo released by Karachi Port Trust, a Russian oil cargo carrying discounted crude, is anchored at a port, in Karachi, Pakistan, June 11, 2023. (PHOTO / KARACHI PORT TRUST VIA AP)

Pakistan has achieved a groundbreaking milestone in its international trade by making a payment with the yuan for the first time in a government transaction, adopting the Chinese currency to settle an oil import deal and marking a shift in the nation’s traditional US dollar-driven trade payments policy.

Pakistan successfully made an international payment in yuan to Russia earlier this month, for the import of discounted Russian crude oil, which arrived in the port city of Karachi last Sunday. 

This oil import from Russia marks a significant development for both Pakistan and Russia, but the utilization of Chinese currency for the payment elevates the transaction to a landmark achievement for Pakistan.

The decision to reach out to Moscow for supply of crude oil at discounted prices was driven by the higher costs of oil in the international market and Pakistan's fragile economy. 

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Musadik Malik, Pakistan's state minister for petroleum, formally announced on December 5 last year that Russia had agreed to provide crude oil, petrol, and diesel to Pakistan at discounted rates. However, the use of yuan for the purchase was not mentioned at that time.

When contacted, the minister confirmed to China Daily that the government has indeed made the payment. "The payment was done in yuan. We look forward to striking similar deals in the future as well," he said.

Financial experts and analysts have commended China for once again coming to Pakistan's aid by facilitating the use of the yuan to settle a trade deal. 

This undated photo shows a worker counting Chinese currency Renminbi at a bank in Linyi, East China's Shandong province. (PHOTO / XINHUA)

Experts in Pakistan believe that Islamabad and Beijing have been actively strengthening their economic ties by promoting trade transactions using the Chinese yuan instead of the US dollar

Noor Fatima, an assistant professor at the Islamic International University in Islamabad and an expert in political economy and international relations, said, "Pakistan's decision to pay for its first government-to-government import of discounted Russian crude oil in yuan is a much-needed and impressive move. This represents a major shift in Pakistan's export payment policy.”

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“Given Pakistan's acute foreign exchange reserve issue, economic crises, the balance of payment and current account deficit concerns, as well as the risk of default on external debt, importing oil could have become a critical issue for Pakistan," she said, adding: “As expected, China has once again stepped forward to help Pakistan.”

Fatima noted that the “arrangement will also provide Russia with a new outlet as it redirects its oil sales from Western markets to the East” due to the Ukraine conflict.

Experts in Pakistan believe that Islamabad and Beijing have been actively strengthening their economic ties by promoting trade transactions using the Chinese yuan instead of the US dollar. This strategic move reflects Pakistan's endeavor to reduce its reliance on the greenback and diversify its currency reserves.

China, as one of Pakistan's foremost trading partners and a significant investor in its infrastructure projects, has fostered collaboration between the two nations through the China-Pakistan Economic Corridor (CPEC). As part of China's ambitious Belt and Road Initiative (BRI), the CPEC aims to enhance connectivity between China's northwest region and Pakistan's southwest port of Gwadar through an extensive framework of infrastructure development, including roads, railways, and energy pipelines.

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Given a significant drop in Pakistan in foreign investment from Western countries, some economists believe that trading in yuan will bring substantial relief to the South Asian nation.

This undated photo shows the national flags of China and Pakistan. (PHOTO / IC)

Shakeel Ramay, an Islamabad-based political economist and commentator on international affairs, said, "The use of yuan will help Pakistan find new means of payment, which will alleviate pressure on our foreign reserves. Additionally, it is important because the world is rapidly moving towards de-dollarization and de-risking by reducing dependence on the dollar.” 

In recent years, there has been a notable shift in global trade as more countries opt to conduct transactions in the Chinese yuan. This shift reflects China's growing economic links and its ambitions to establish its currency on the international stage.

Mustansar Klasra, a visiting faculty member at Quaid-i-Azam University in Islamabad, explained the reasons behind the adoption of the yuan.

"The adoption of the Chinese yuan in international trade is driven by various factors. Firstly, it reduces reliance on the US dollar, thus mitigating currency risks and fostering diversification in trade relationships," Klasra said.

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“Second, China's expanding economic influence and its ambitious Belt and Road Initiative provide strong incentives for partner nations to embrace the yuan for bilateral trade, leading to the development of closer economic ties. Moreover, China's concerted efforts to establish offshore yuan centers and expand financial infrastructure have significantly improved accessibility and appeal of the Chinese currency for international traders," Klasra added.

Numerous countries have actively engaged in yuan trading, either through bilateral trade agreements or by establishing currency swap arrangements with China. 

The writer is a freelance journalist for China Daily.