Yesterday was a dull day at stock market - shares traded were at multi month low, the only good news come in after hours i.e. Government of Pakistan got 15 billion RMB [$2.2bn} loan from China. Well, the inflow was accepted, and priced in. The subtle difference a few might have ignored or overlooked is that the loan is to the government, not the central bank, and that has a few positive implications.
The first and foremost is in the Net International Reserves [NIR] calculation. The number is getting ugly (read “Scary NIR - don’t look at it”). This loan is worth looking at. Unlike, the deposits from UAE or KSA which were parked with SBP, the Chinese loan is secured by government and it can be used for budgetary borrowing. That is why, the NIR will be improved by the same amount - hence, the negative NIR would now be around $9-10 billion.
This transaction is probably at similar rates as deposits from other friendly countries, but with better implications. The number will also be reflected in net foreign reserves [NFA] of SBP which have been falling for some time now. It started falling in FY17, as the outflow was $204 million and sharply declined to $814 million outflow in FY18. This year so far is even more miserable - the decline is $880 million till 15th March.
The SBP has started computing and publishing this number since FY09 and the stock has remained positive since then. But, in FY19, the stock position, for the first time in the history is in negative territory. That is a big concern as the decline in NFA is resulting in spike in SBP’s Net domestic assets (NDA).
The deteriorating NFA to NDA ratio is not a good indicator as it has inflationary consequences in the medium to long term, and in Pakistan empirical evidences suggest that NFA to NDA ratio and CPI are inversely correlated. The argument is intuitive - in days of falling NFA, government budgetary borrowing pressures fall on domestic banking system. Since the domestic liquidity is limited, the onus of borrowing eventually - directly or indirectly, falls on the central bank.
This means the domestic supply is not growing in proportion to demand - enhanced due to money creation, demand driven inflation is an undesired consequence. When the money flows in from external sources, for government borrowing, the onus on domestic banking borrowing is reduced, and that may help improve private sector credit - enticing producers to enhance supply for higher demand.
Chinese money is a welcome change. But it may be a little too less, and a little too late. Government has to relentlessly work on improving NIR and NFA positions through more direct borrowing. The loan from IMF or deposits from friendly countries do not cut the deal.
Yes, these are important for window dressing and for foreign payment in days of abysmally low reserves, but these are short lived. The government needs to now knock the international capital market - $1 billion Euro Bond is expiring next month and $1 billion Sukuk is retiring at the end of calendar year. The need is to replace these with bigger inflows.
That said, it is pertinent to note that, these debt flows are not the best option, the only way to sustain is to buy time, and churn sustainable foreign exchange through enhanced exports, remittances and services inflow.
Comments
Comments are closed.