Foreign investment in the government's debt instruments, including Market Treasury Bills (T-bills) and Pakistan Investment Bond (PIBs) surged to $2.26 billion during this fiscal year (FY20).
According to State Bank of Pakistan (SBP), foreign investment in T-bills has recorded largest single day inflows of $536 million on January 16, 2019 in Special Convertible Rupee Account (SCRA). With the arrival of these inflows total net foreign investment in T-bills and PIBs reached $2.26 billion.
Analysts said with some improvement in exchange rate and current account, foreign investors mainly from the US and the UK are taking interest in government securities and heavily investing in T-bills and PIBs.
In order to anchor inflation, the SBP has adopted a tight monetary policy stance and gradually increased the policy rate, which currently stands at 13.25 percent, the highest level since October 2011. Higher interest rate has provided opportunities to foreign investors to get good margins on their investments in government securities.
Foreign Portfolio Investment (FPI) flowed into T-bills and PIBs after a gap of over two years, as investors responded to the continued increase in reserves buffers; sustainability of the exchange rate regime and the comfort offered by the inception of the IMF $6 billion Extended Fund Facility program to support Pakistan's balance of payment.
The SBP mentioned in a recent report that this investment was an outcome of the continued improvement in the country's balance of payment position and reserve buffers, sustainability of the exchange rate regime; and the comfort offered by the inception of the IMF program. Economists said that massive inflows on account of government securities will also help reduce the pressure on external account and build the foreign exchange reserves.
The detailed analysis revealed that with $2.252 billion inflows and $18.448 million outflow foreign investors in T-Bills stood at $ 2.23 billion during this fiscal year. In addition, PIBs fetched $24 million foreign investment during FY20. Cumulative foreign investment in government debt instrument surged to $2.26 billion from July 1, 2019 to Jan 16, 2020.
International investors have been investing in Pakistan's equity markets for a long time. Such investments are considered portfolio investments, just like investments in debt instruments, and use the same framework of SCRA. Such investors have been able to move capital in and out of our financial markets without problems for the Pakistan economy.
In December 2019, State Bank has already issued a detailed statement on foreign investment in government debt instrument and said that increasing foreign investment in government's securities is manifestation of growing confidence of international investors on the positive outlook of Pakistan's economy.
The SBP believes that the shift to a market based exchange rate system has addressed previous concerns regarding the sustainability of the exchange rate regime and support to attract more foreign investment in debt securities.
Discussing the risks relate to foreign investment in government securities, State Bank mentioned that risks posed by foreign investments in debt instruments are limited. However, SBP said that it continues to monitor developments in the financial sector carefully and stands ready to take action against any risks.
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