In pursuit of (hot) money – Newspaper

The search for "hot money" – funds flowing from one country to another to obtain a short-term gain in the interest rate gap in the two markets or the anticipated changes in the exchange rate – is a risky proposal for Some.

These speculative capital flows can come and go very quickly, which can generate monetary instability.

For others, it is a good idea to attract this type of money to finance the national debt, build capital markets by bringing competition to commercial banks in financing government debt and propping up foreign exchange reserves to bring account stability. external in the short term. term at a time when other international capital inflows are scarce.

The idea is to mitigate political, economic and market risks for foreign portfolio investors while offering them a good return on their investments.

With the exchange rate adjusted to a large extent and the policy rate rose to 13.25 percent, the Economic Coordination Committee (ECC) approved significant tax concessions for foreign portfolio investors interested in buying public debt. The withholding tax applied to profits obtained by the provision of government securities has been reduced from 30{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} to 10{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} for non-resident companies.

The reduced tax will be treated as the total and final responsibility for foreign investors who choose to invest in government bonds through the Special Convertible Rupees Account (SCRA) and will not be required to file tax returns.

The idea behind these tax incentives for foreign portfolio investors is to mitigate their monetary, political, economic and market risks, while offering them a good return on their investments to increase the country's foreign exchange reserves of $ 8.5 one billion existing at the mandatory level of $ 11.2 of the IMF. bn at the end of the current fiscal year.

The government expects $ 6.2 billion in private capital inflows and debt portfolio, loans from banks and other sectors to meet the estimated external financing requirements of $ 25.6 billion for the current fiscal year and increase reserves officers at $ 4.4 billion, according to documents detailing the loan. agreement with the IMF. The rest of the financing needs will be covered through disbursements from official creditors, the IMF, foreign direct investment and privatization income, in addition to syndicated loans and euro bonds.

Since the beginning of the current fiscal year, according to the SCRA account details published by the central bank on September 11, US and British investors have contributed $ 99.6 million in treasury bills. While US dollars persist, British buyers have taken $ 5.8 million from the $ 14.9 million they had brought.

The central bank is confident that Pakistan will successfully attract significant flows of hot money, even if it does not approach the $ 30 billion attracted by Egypt in hot money in less than two years after it radically devalued its currency under an agreement with the IMF.

However, analysts like Ali Asghar Poonawala do not see much money. “Foreign exchange reserves and precariously low currency risks will keep foreign buyers at bay. Egypt managed to attract inflows due to geopolitical reasons: they came overwhelmingly from the Gulf states, especially Saudi Arabia, as a sign of support for General Sisi's regime. Geopolitics was the biggest determinant in the case of Egypt. "

An economics professor at the Lahore School of Economics, who prefers to remain anonymous, agrees with him. “Credibility (of the government), trust issues, uncertain economic and commercial environment, exchange rate risks and political volatility will probably be the main impediments to the plan. Given the expectations of currency devaluation and the high inflation rate, we are not offering very attractive returns. A more pragmatic approach would have been the flotation of euro bonds. "

But people like Samir Ahmed, CEO of Knightsbridge Capital Group, are quite optimistic about the plan. “They can bring hot money. There is a lot of money available in developed markets and interest rates are very low. So, if someone has dollars or if someone can borrow funds at a low rate and place them in Pakistani rupees, and even if they take into account the foreign exchange risk (due to the difference in inflation rates in Pakistan and the United States) and the cost of conversion and etc., I believe that foreign buyers of government debt should get a good return. "

He also believes that Pakistan's geopolitical situation is somewhat favorable at this time, partly due to "the part we are playing in the Afghan peace process." The IMF program and the financial support of Saudi Arabia and the United Arab Emirates should also inspire confidence in investors. But there is also another side. For example, we face this threat of action under the FATF. In general, given the progress we have made in these areas, the geopolitical situation is more or less positive. ”

He points out that SCRA numbers show foreign investors' interest in government debt, which is where they are trying to attract hot money. "It is not a large amount, but it can grow. The good thing is that the government is looking to finance its debt in local currency bonds. If there is a new class of investors competing for government debt, it will eventually lower interest rates and the cost of loans as well as helping to develop the domestic bond market, currently dominated by commercial banks. Therefore, this new set of investors will strengthen local bond markets. "

He believes that initially the money will come in very short-term debt. "Once there is a certain degree of stability in economic conditions and investors become more familiar with us, some of them may be tempted to move to longer-term bonds and at some point start looking for corporate bonds with several years of expiration ".

Ahmed agrees that monetary movements can be volatile and affect the short-term exchange rate. “There are risk factors. Hot money, as the term implies, responds to very small interest rate movements. But in the way I see it in balance, I believe that even if hot money flows at a certain stage, we will not be worse. For that period of time when this money is in, we will be able to finance the government deficit and obtain the hard currency that we need so much. In general, this is a very well thought out strategy and, like everything else, it will have to be properly marketed to the relevant institutions abroad in this type of business. "

Published in Dawn, The Business and Finance Weekly, September 16, 2019