Pakistan is witnessing unprecedented inflow of foreign investment in its debt instruments with the latest figures showing the number has crossed $1 billion and analysts at Topline Securities expecting inflows to reach a record $3 billion by the end of the current fiscal year in June 2020.
Benchmark interest rates have stood at 13.25 per cent since the last rise in July. One senior official at the central bank said this had contributed to inflows of about $1bn, with more likely to arrive in the coming months, reported Financial Times.
The central bank has been “pitching the Pakistani bond market directly” to foreign investors, said Saad Bin Ahmed, equity head at brokerage Arif Habib, while talking to the foreign publication. “There are concerns that this is hot money, and at a single click this money will go out, possibly when the central bank cuts the policy rate. But my expectation, considering the state of the economy, is that they may not even cut the rates until July 2020.”
Latest data from the central bank shows that another $51 million has been been invested in treasury bills this week alone, with $35 million coming in from investors in Luxembourg.
Charles Robertson, chief economist at Renaissance Capital, said the case for buying Pakistan’s bonds was straightforward. “Where else can you get double-digit yield on an undervalued currency?”
Mr Robertson noted that the rupee was at its lowest level in 25 years, measured by its real effective exchange rate, meaning foreigners could earn outsized returns on local- currency bonds. This is “the first new emerging market reform story since Egypt in 2016,” he added.
But the president of a privately owned Pakistani bank, while talking to FT, warned that high interest rates were having a “crippling effect” on investment by domestic companies. These rates would need to be brought down to encourage businesses to borrow, he added.
“The problem is that if you bring down interest rates, that may discourage the inflow of foreign money. It’s going to be a very delicate balancing act.”
It’s a ponzi scheme. Lebanon did something similar and is now paying for it. Interested people should look at the events unfolding in that country. That is where Pakistan is headed!