Deposits plunged due to Hot Money Outflow

By Asad Rizvi

In yet another sensible move National Saving Schemes (NSS) rates have been cut. Next should be a downward adjustment in PIB Coupon rates, as the current coupon rate makes government borrowings very costly.

We often see articles in the newspaper suggesting that cut in NSS rates will hurt savers. This argument was/is never supported by an active financial professional, as savers are only a few representing the rich lot. Genuine Oldies are always blessed with higher return through higher Behbood Certificate Rates that almost matches 10-year PIB Coupon rate.

The global norms have changed. Governments loaded with debt cannot afford to offer a hefty return to pensioners and savers to pile more debt. In past, investments in bonds were the preferred choice, as it would support the cash flows, but the declining bond yield is biting forcing them to invest in riskier assets such as real estate, equities, or private equities.

In advanced economies, the new normal is that the savers are penalized and instead the borrowers are paid, which is done to support their economies from plunging into depression.

So, will further sharp cut in policy rate help? No, it will only reduce the cost of borrowing and reduce the piling up of debt and financing.

KIBOR Rate is the benchmark rate that banks only offer to their most creditworthy customers having a strong balance sheet.

Remaining customers do not fall in the same category and charges are based on business activities.

However, though SBP is asking commercial banks to opt for an easier lending stance because of the pandemic. Banks are most likely to tighten their lending standard due to the non-availability of sufficient credit and fearing the risk of an increase in nonperforming loans due to a sharp plunge in business activities.

Easy Lending to all is not possible as there is a severe liquidity crunch. SBP has also far already injected Rs 1.548 Trillion through its Open Market Operation (OMO).

HOT MONEY

The bad news is, no one took notice that as per SBP update, Commercial Bank Deposit has plunged by Rs 651 billion to Rs 14.475.

Thanks to all those objecting to hot money, but did not have the understanding of the monetary unit concept due to lack of practical market experience, which has caused double damage to the economy. Out of the total outflow of $ 4.146 Billion, $ 1.035 billion was Equity that could put severe constrain in the equity market, as the outflow amount is nearly Rs 170 billion. Unfortunately, experts/analysts have never spoken about the EQUITY OUTFLOW as they may not have any idea about this entry or may have intentionally preferred not to discuss. The remaining amount was investments in T/bills and Bonds. The outflow of foreign currency means roughly Rs 680 billion have been sucked out. 

Dr. Zubair’s “Hot money” related petition is with the Supreme Court. SCRA outflow has caused severe damage to the cash flow. As T/bills investments by foreigners were a blessing in disguise. (I am willing to talk to any credible professional in a live tv talk show) Hot money was a complete win-win situation for the country. It was providing foreign currency liquidity at investors' risk and simultaneously Rupee liquidity was generated, which is why banks deposit has plunged.

Since we are a debt/deficit economy, Rupee and Foreign Currency funds are not available in surplus due to shortfall in attaining Revenue target and because of poor Export performance. This is why SBP was/is forced to inject a larger amount of liquidity through OMO or else government borrowing is the only other source to meet the liquidity requirement.

While Currency in Circulation has already surged to Rs 6.183 Trillion. Sadly, Derivatives that were well managed, as it came down to $ 2.8 Billion from an all-time high of $ 8 billion saw a surge by $ 1.7 billion to $ 4.5 Billion.

Let’s hope better sense will prevail.

 

Disclaimer: The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN)

Posted on: 2020-06-03T14:37:00+05:00

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