On Monday at the Pakistan Innovative Finance Forum by the Asian Development Bank, Finance Adviser Dr. Abdul Hafeez Shaikh announced $1 billion worth of government debt has been bought by foreign investors. An incredible inflow that equals the increase in official foreign exchange reserves for the fiscal year.
State Bank of Pakistan (SBP)’s data showed $1.1 billion has been invested in treasury bills and Pakistan Investment Bonds, though the latter only amounted to $3.2 million. In November alone, Pakistan received $630 worth of foreign investment.
Read more: Pakistan’s Economy is Turning Around!
Out of the $1.1 billion, Pakistan received $612.7 million from the United States, $466.4 million from the United Kingdom, $5.1 million from the United Arab Emirates, $496,000 from Cayman Islands and $363,000 from Ireland. This increased the central bank’s gross foreign currency reserves to $8.4 billion on November 15th from $7.8 billion in May.
Debt auctions have been attracting foreign inflows in the form of short term Treasury bills (T-bills), with cut-off yields on 3, 6 and 12 month papers, since July when interest rates hit a peak of 13.25% with the pace accelerating every month.
Current Account Deficit drops down $2.90 billion to $2.05 Billion during Oct while Pakistan treasury bills attract over 700 millions dollar investment.
Current account deficit is down by 34 percent.
Great news .
— Wajahat Ullah Safi وجاہت اللہ (@safi_wajahat) November 15, 2019
Treasury bills are a security issued by the government itself, so when a party buys one, they are essentially lending money to the government. The term security means any medium used for investment such as bills, stocks or bonds. Treasury bills are one of the safest forms of investment as the lender is the government so they are considered risk-free for the investing party.
How did it Happen?
The SBP’s governor was pursuing a policy of attracting foreign money to boost foreign currency reserves by getting sweeping tax concessions approved from the federal for non-resident companies in September 2019. The government has cut the withholding tax from 30% to 10% for non-resident companies having no permanent business establishment in Pakistan, being charged on the profit made on the disposal of securities. However, taxation on PIBs is higher than T-bills for non-resident companies which explains the lower proportion of investment gained from longer-term PIBs.
These foreign investors have been given special treatment on their investment in T-bills and PIBs acquired through the Special Convertible Rupee Account.
Furthermore, SBP kept the interest rate unchanged at 13.25% for the second time in its bimonthly monetary policy announced on November 22nd. Pakistan is one of the few countries in the world where interest rates have gone up in the past six months. The US Federal Reserve has cut interest rates three times this year, sparking a “race to the bottom” among other central banks around the world.
#SBP policy rate remains unchanged at 13.25%. For complete statement:
Urdu: https://t.co/uFUG08SZBj#MonetaryPolicy Information Compendium: https://t.co/lq60OxoV0q pic.twitter.com/OGjrrN84nC
— SBP (@StateBank_Pak) November 22, 2019
Topline Securities CEO Mohammad Suhail attributed the large investment in T-bills to better marketing by SBP and the banks. According to Suhail, “T-bills were not marketed in the past, even when interest rates were high as in 2008 and 2014. The foreign investors were actively invited to invest in the T-bills which offer higher returns today.”
What Does it Mean?
Samiullah Tariq, director research at Arif Habib earlier in September said foreign portfolio investment in T-bills could increase foreign exchange reserves, net international reserves in line with the International Monetary Fund’s requirement and develop a liquid foreign exchange market, “which can induce confidence into foreign investors in Pakistan”. Tariq said investors intending to make strategic investments in the country would become more comfortable with the availability of a deep and liquid foreign currency market.
At the same time, high interest rate at 13.25pc, has barred potential borrowers to get more funds from banks
Although the foreign investment in debt securities has provided a temporary relief for the government, it can put additional pressure on the foreign currency reserves if the investors decide to pull out their money.
This concern was also raised by Samiullah Tariq who said the only risk is that if a major investor intends to liquidate its investment in treasury bills and repatriates dollars, a market determined currency could drastically devalue. “But, we could only lose money which we receive,” he said, citing the SBP Governor’s recent comment.
At the same time, high-interest rate at 13.25pc, has barred potential borrowers to get more funds from banks. The high-interest rates also caused huge default of Rs88.3bn in the first half of FY19 reflecting the worsening situation of the borrowers and increasing losses of the banks.