Foreign inflows into T-bills

The present government has been very exuberant about the sharp improvement in the balance of payments position of the country and a rise, however modest, in its foreign exchange reserves. While the government could take credit for this achievement due to a major shift in its policies, an auspicious development in the form of a change in the financial behaviour of foreign investors, particularly their desire to invest more in Pakistan, has also contributed to this healthy development. According to the latest data released by the State Bank of Pakistan, Pakistan has received dollar 1.097 billion in T-bills from 1st July to 19th November, 2019. It may be mentioned here that T-bills or Pakistan Investment Bonds (PIBs) were not usually sold in the foreign markets in the past years even when the rates on these papers were high. One of the reasons could be that foreign investors were not actively invited to invest in these avenues of investments or they could get better rates elsewhere. Most of the amount during the current fiscal year came from the US and the UK, with the former accounting for dollar 612.683 million while the latter contributing dollar 476.05 million. Investors from the UAE, Ireland and the Cayman Islands parked dollar 5.06 million, dollar 2.36 million and dollar 0.44 million, respectively, in T-bills. While all these investors preferred to invest in short-term T-bills, some US-based investors also opted to invest dollar 3.19 million in longer-tenor PIBs.

In addition to the above, the government also succeeded in increasing the inflows of foreign direct investment (FDI), which eventually helped improve the balance of payments (BoP) position of the country. According to the latest data, FDI soared to dollar 650 million during July-October, 2019 as compared to only dollar 192 million in the same period of last year. Foreign investment in equities in the stock exchange is usually subject to a great deal of volatility. Its inflows during July-November, 2019 amounted to dollar 355.84 million while outflows stood at dollar 363.53 million.

While the FDI inflows and equity investment and their fluctuations could be considered a routine affair, positive developments in foreign inflows in T-bills and PIBs are definitely welcome and could be interpreted in a number of ways. It seems that the monetary authority of the country - State Bank of Pakistan (SBP) - has done a good job in selling T-bills to foreigners this year and has been able to attract a substantial amount of over dollar one billion which would be a great help in improving the current account deficit of the country and raising the level of foreign exchange reserves held with the SBP. This is quite contrary to the old pattern when there was little or no foreign investment in T-bills. It is also no secret that increased confidence of foreign investors in the solvency of the country and tightening of monetary policy has also helped in attracting foreign investors to invest a huge amount in the gilt-edged securities. Pakistan is one of the few countries where interest rates have gone up in the past four months while most of the other countries have reduced their discount rates. Many countries have lowered their policy rates to an extent that their commercial banks are now offering negative real interest rates to investors. Inflows tended to increase after July, 2019 when interest rate in Pakistan was raised to 13.25 percent per annum and the spread between Pakistan and other countries continues to widen since then. For instance, in the auction held on 30th November, 2019, cut-off yields on three- six- and 12-month T-bills were 13.51 percent, 13.28 percent and 13.24 percent, respectively, which were highly attractive compared to those in other countries. The government paper also becomes particularly attractive and financially rewarding when foreign investors know that Pakistani rupee is somewhat undervalue at the moment and the country is bound to follow a strict reform programme agreed with the IMF which would not let the country to dishonour its liabilities.

While the inflows into government paper are welcome, it may not be forgotten that the situation could change quickly and a reverse flow is possible under certain circumstances with a highly negative impact on the external sector of the country. Increased tensions with India or some untoward developments within the country could constrain foreign investors to encash their securities or easing of monetary policy in Pakistan and higher interest rates in other countries could induce foreign investors to convert their holdings into foreign currencies to earn higher returns on their funds. This will be particularly stressful when the country is faced with a difficult balance of payments situation while the forex reserve position is not satisfactory either. Also, one needs to recognise the fact that investment in equity market is not something to brag about. This kind of investment always leaves the country at the first hint of some kind of risk or uncertainty.