Pakistan’s recent inflow of hot money through Treasury Bills and Pakistan Investment Bonds has been an issue of contention as State Bank of Pakistan set a whopping interest rate of 13.25% to reel it in but Citibank representatives were quick to come to its defence.
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.
Tenders for Market Treasury Bills were invited by State Bank of Pakistan on Dec 04, 2019 with settlement date on Dec 05, 2019. Auction Target was Rs. 300.00bn. Realized Amount Rs 370.33bn.
— Capital Stake (@CapitalStake) December 5, 2019
The foreign investment, current account stabilisation and debt repayment lead to an international credit rating agency, Moody’s, upgrading Pakistan’s outlook from negative to stable.
However, some remained skeptical of the impact of hot money raising concerns over its implications for local banks and industries. It was argued that a high interest rate of 13.25% would bar potential borrowers from approaching banks for funds. 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.
On a recent talk show, some economic experts criticized the macroeconomic developments that came at the cost of the country’s microeconomic health. On ground realities were painted gloomy as a product on dwindling economic activity that has reduced the volume and production of sales which impacts traders’ profitability.
However, in an all-encompassing conversation at a media round-table on Monday, the senior management at Citibank Pakistan gave a ringing endorsement to the government’s economic policies.
“We are seeing a paradigm shift in economic management with efforts being made towards addressing the low tax-to-GDP ratio and the move from managed to market-based exchange rate are helping restore investor confidence,” Managing Director Nadeem Lodhi said while commenting on the economic stabilisation measures taken by the government.
The Citibank team was unanimous in saying that the government has set the right direction with its economic policies and if it perseveres without wavering, “the dividends will be huge.”
“Foreign investment in government papers can serve as a catalyst to revive economic activity [and] investors are testing the waters, once they have some experience in local debt markets, they will start to go long as well.”
They also acknowledged that there are disruptive impacts from the course that has been chosen, citing the noise being generated by the effort to broaden the tax base as an example, but underscored that the will must remain to stay the course.
He said interest rates must remain high considering inflation, that the tax base must be broadened and the exchange rate must continue to be market determined. “We are playing an extremely tight game with interest rates,” he said, pointing out that the gap between inflation and the discount rate was getting narrower.
Lodhi has good reason to argue for high interest rates. His bank has more than Rs75 billion invested in government securities compared to Rs54bn given out as advances in the nine month period ending September. In the same period last year, these figures were Rs18.67bn as investments versus Rs36.5bn advances, meaning the bank has moved heavily into government papers as the discount rate soared from 7.5 per cent in September, 2018 to 13.25pc by September this year.
Moiz Hussain Ali, country treasurer at Citibank, shrugged off all talk of risk posed by foreign investment in short-term government debt, the so-called “hot money” coming into T-bills. “Foreign investment in government papers can serve as a catalyst to revive economic activity [and] investors are testing the waters, once they have some experience in local debt markets, they will start to go long as well.”
He claimed some foreign investors among his own client base were already showing interest in going into longer tenors, saying he had already placed one client in 12-month paper. He was confident that others will follow once they develop a sense of comfort with the Pakistani debt market.