Pakistan finally attracts foreign $75M hot capital in T Bills - good or bad?

March 29, 2024 (MLN): Now this is good news. In March Pakistan has already attracted $90M of hot capital from foreign investors in domestic debt markets. This is coming after a long time ever since Pakistan opened up its debt capital markets for foreign investments under Dr Reza Baqir. Is the investor confidence coming back?

Critics were cynically doing their job of criticizing when Pakistan was seeing hundreds of millions of dollars at a 13% interest rate while the world was operating at zero interest rates.

It has taken Pakistan to offer a much higher interest rate differential - 17% now vs 13% than against US Fed rates - to see some sort of flow kicking in. Investors now want higher returns for their exposure in Pakistan. 

If the currency depreciates less than 11-12% in 12 months, the Rupee exposure investors in T Bills will outperform the Naya Pakistan Certificate investors taking USD exposure lending to Pakistan at 8-9%.

Hence, I repeat NPC's USD returns should be increased to 10% flat to attract money from overseas Pakistanis who themselves convert in into PKR most of the time reducing the dollar outflows. 

The high cost of debt is a reflection of poorer economic management - aim to bring it to single digits in the next 4-6 years sustainable without creating asset bubbles or balance of payment crises.

The only way to provide such an environment is +10% exports growth, a 1% increase in tax to GDP ratio/year, enhancement in agriculture yields, reduction debt to GDP ratio by 2%/year, 1% primary surplus, 1% current account deficit/year and selling all loss-making state-owned entities. 

Meanwhile, let's hope the hot capital turns cold and sticky. Real challenge and success in reducing the interest rate, improving credit ratings, paving way for export-led growth and attracting foreign capital even at 14-16% interest rates.

A lot of investment is needed in training the human capital, improving the law and order, upgrading the schools and colleges syllabus and ensuring tax compliance. 

The author is an independent economic analyst and writes on Twitter and Linkedin.