It is important for the government to revive the economy but it is equally important to attract foreign investors to invest in the country. Economic team of the government has recently visited US and Europe and tried their best to convince and attract foreign investors to invest in government treasury bills and bonds because lending rates in Pakistan are currently very high. Interest rates in Europe and US are not so high therefore, foreign investors can get higher returns by lending money to Pakistan because of high interest rates whereas Pakistan would get foreign currency, which will help building its foreign reserves. This is technically called Carry Trade and is also known as Hot Money. Hot Money means is a trading strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return. Pakistan is already attracted around USD400 million as Hot Money from international investors. SBP officials believe that Pakistan can get up to USD 2 billion as hot money in next few months whereas Ministry of Finance is also finalizing the issuance of Euro Bonds with very attractive rate of return.
Now the question is how can a foreign investor invest in Pakistan with volatile exchange rate even if interest rates are so high. The simple guess is, dollar rupee exchange rate will not move significantly in next 12 months or so. This is also evident from the current trend. Dollar is appreciated by 2 paisa, rupee is depreciated by 10 paisa, these are the levels when rate is determined by the so called market with hidden interference of the central bank. The logic behind this point is simple, government and SBP are approaching international investors to invest in treasury bills of Pakistan which is rupee-dominated instrument without any provision of forex hedge. Therefore, it is implied that there would be an understanding among the parties that dollar rate will not change thus providing enough confidence to the investors to take the currency risk unless unexpected development happens. Most likely government will try to keep the dollar rate static as did by the previous government meanwhile, foreign investors will invest in treasury bills for few months, and will take their principal back along with abnormally high returns, while forex rates would remain at the level when they actually invested. The additional benefit for the investors would be if rupee is appreciated by the time they leave thus they can also make some money through forex rate movement. On the other side, it is being said that local businesses in Pakistan will not survive at this level of interest rate. Pakistan would be happy in getting billions of dollars as Hot Money while dollar rate remains stable even if small local businesses in Pakistan wipe out by that time.
Historically SBP sells treasury bills and bonds to commercial banks, insurance companies and mutual funds. It has never sold treasury bills to foreign investors in the past. SBP Governor was last posted in Egypt by IMF and he made it possible to raise around USD 16 billion through treasury bills, which was also categorized as Hot Money. He is replicating the same in Pakistan now. Presently their estimate is only USD 2 billion but this can go in double digit as well. There is no doubt that Hot Money increases the size of foreign debt component and presenting foreign currency debt as an investment is a choice of the decision makers, which will never change the nature of the transaction though. Hot Money can only be beneficial for the economy if the funds are utilized to increase exports and decrease imports otherwise it will be a huge burden on Pakistan. The public debt-to-GDP ratio is expected to remain high in fiscal year 2021 at 80.8 percent, increasing the exposure to debt-related shocks, as per the World Bank report. Not a long ago, media used to tell us that debt is a bad thing and international lenders will ask the details of national security and ultimately force Pakistan to compromise its national security. Interestingly no one on the media discusses this aspect these days which means it was never an issue as such but such issues were created just because of political differences.
Anyhow, Pakistan is launching Euro and Sukuk Bonds soon. Current account deficits will determine the credit rating of Pakistan which is also due in next few weeks before the issuance of Euro Bonds. Interest rates are currently at 13.25 percent whereas SBP has recently sold treasury bills at 14.25 percent. In last T-bill auction, banks offered around PKR 2,000 billion but SBP only took PKR 425 billion at 12.76 percent, which shows that commercial banks are very much inclined to participate in the auctions of T-bills. While banks remain interested in lending to government leaves less room for them to lend to the private sector.
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It is important for the government machinery to focus on addressing the loopholes in the banking and financial sector. Pakistan is on the gray list of FATF, which is a hanging sword on Pakistan. Why Pakistan is not able to address these issues in all these years. It is in the interest of Pakistan to fix its banking and financial sector once for all. Recently a large bank of Pakistan was charged heavily in US because of some lapses in their system. If God forbid, Pakistan is put on the black list then it will cost it badly, and will make difficult to transfer funds to and from Pakistan.
We should also keep this in mind that a large portion of Pakistan’s economy is informal whereas a large number of overseas Pakistanis are sending their remittances to Pakistan through hawala system, which needs decision makers special attention. Pakistani banks should be encouraged to either open their branches in those countries or make any arrangement with the local banks there to facilitate the overseas Pakistanis so that they can remit their funds swiftly to their families. As a first step, government should conduct a survey and try to identify the core reasons for sending money through hawala system. It is not possible that we couldn’t find a solution to this problem. SBP should enforce its policies strictly and no fronting bank accounts should be allowed to open in Pakistan, which has become a source of money laundering.
The World Bank has said Pakistan’s economy is slowing as it faces yet another macroeconomic crisis due to high twin deficits and low foreign reserves. The World Banks has projected 2.4 percent growth in the fiscal year 2020, with continued fiscal consolidation and a tight monetary policy stance. In addition, growth is expected to recover slowly, to 3 percent in fiscal year 2021, if macroeconomic conditions improve and external demand pick up on due to structural reforms and increased competitiveness. This recovery is conditional on relatively stable global markets, a decline in international oil prices and reduced political and security risks. Inflation is expected to increase in fiscal year 2020 to 13 percent but it will start declining afterwards.
Due to political differences, it is being said that Pakistan was at the verge of bankruptcy. The main cause of our economic problem is political instability. Political instability which started in 2016 and is still going on. Not sure what decision makers are thinking to stabilize this very critical aspect. The country’s large-scale manufacturing output shrank for fifth month in a row, raising fears of massive layoffs across the industrial sector. Presently, IMF and the World Bank are forecasting not so high growth rate, a lot of businesses are being shut down, staff is being laid off, input cost of business (gas and electricity) has increased many times, taxes have increased, car sales have dropped by 40 percent, motor cycle sales has dropped by 25 percent, sales of FMGC has dropped by 30 percent, SMEs which provides over 80 percent of employment are now in a bad shape, hence the economic situation is not so good. So far, we have not seen any noticeable effort in support of the industry. All efforts are being made in raising money to fund the gap, which will have serious consequences on the economy in medium to long run.
[box type=”note” align=”” class=”” width=””]The writer is a consultant and can be contacted on twitter (@aroojasghar)[/box]