Pakistan has been suffering from a chronic shortage of foreign currency. Each incremental dollar has cost much political capital, sovereignty and because of the skewed domestic distribution of assets and power, the poor, which is most of us, have to bear the brunt of consequences in the form of higher inflation etc.

Though the situation admittedly is far more complex, here is a simpler option, which only claims to address just the symptom and not the real cause of this foreign exchange shortage.

When the government borrows dollars, the State Bank of Pakistan (SBP) gets the dollars, gives rupee-equivalent to the government. Then when the dollar debt servicing starts, the government gives rupees to the SBP, at the then-prevalent rupee /dollar rate, and SBP then remits the dollars to the lenders.

Hence, the SBP has to have dollars for the principal and interest servicing. Dollars came in and dollars, principal and interest, will have to be found and remitted.

All dollar lenders are foreigners including Pakistani expats, and some resident Pakistanis, through Roshan Digital Account. Dollars have to be remitted to all of these lenders.

Whereas local Pakistanis dollarize because there is no, arguably, better inflation hedge. Can we come up with something which takes care of the dollar needs of the government and the need of an inflation hedge by ordinary savers? Here is an option.

The government should create a debt instrument, a bond, allowing ordinary Pakistanis to lend to the government in dollars and get paid in indexed rupees. For example, the government can issue a 5-year bond for USD 100 million, 7% coupon rate. All Pakistanis with a bank account can subscribe to this in multiples of USD 100. They can buy dollars from money changers, deposit cash to subscribe or invest from their USD holding in Pakistan banks. There seems to be no legal barriers to this structure.

For example, I buy USD 1,000 from a money changer at Rupee 270/ USD and invest it in this bond. I invest USD 1,000 or Rupee 270,000 today. So the first annual coupon payment, the Rupee/ USD rate on that date is, let us say, 290, shall be 1000*7%*290 = rupee 20,300.

So I made 7% annualized in USD but in PKR interest payment I made 7.51% and a capital gain, in Rupee, of 7.4% as my principal of PKR 270,000 is now PKR 290,000. Total rupee return of 14.93%, and most important, my hedge is still intact.

The next coupon payment shall be converted at the then prevalent Rupee/USD rate, let us say, of 300 and the capital gain to boot. If these bonds can be listed on Pakistan Stock Exchange, ensuring liquidity, that will be the day and these bonds would be allowed to be redeemed in part or full at any time.

This way the local savers shall be hedged, the government gets foreign currency with liabilities in rupee only.

Similarly this facility can be extended to expats also, they might need this structure and flexibility to pay for their rupee expenses and buying property etc., hedged and not worrying about whether dollars will be there or not come servicing time.

A similar mechanism has been available with the rupee indexation for IPPs for their dollar debt also, but there, the dollars have to be remitted.In the long run, total return, in a perfect market, from equivalent tenor PIB and these bonds should not be different over time, but then we do not live in that perfect world. The structure suggested is transparent and easy to comprehend.

We believe there is enough demand for an inflation hedge and dollar liquidity available in the market to maintain healthy inflows. As long as the government gets dollars, and it does not have to pay dollars back, it is worth exploring.

The article does not necessarily reflect the opinion of Business Recorder or its owners

The article, originally published on March 2, 2023, was updated on March 7, 2023 because of a calculation error. The error is regretted, and has been rectified.