The State Bank of Pakistan (SBP) data uploaded on its website indicates that around one billion dollars of government debt securities (from three months to a year) have been purchased by foreign investors, mostly in the UK, which may have contributed to the strengthening of the rupee. The reason for this inflow, analysts are agreed, is due to the still high discount rate in Pakistan relative to the rest of the world (where it is close to zero due to varying degrees of lockdown to contain the coronavirus). In Pakistan, the discount rate was 13.25 percent effective 20 July 2019 to 16 March 2020, 12.5 percent from 17 March to 23 March, 11 percent effective 24 March to 15 April 2020 and 9 percent effective 16 April onwards.

There is considerable opposition to reliance on 'hot money' through a high discount rate that may leave the country at a moment's notice by economists in general. The SBP second quarter report maintained that "inflows into local currency government securities (T-bills and PIBs) dominated overall portfolio investment which rose to 1.4 billion dollars in H1-FY20. However, inflows in portfolio investment account (stock markets) were relatively lower at 471 million dollars due to retirement of a one billion dollar sukuk issued in November 2014." The reason cited in the report: "foreign fund managers invested in T bills and PIBs not only in chasing risk adjusted returns offered by Pakistan on government securities but also in response to a sharp improvement in the BoP." The contribution of the former, in our opinion is far greater than the latter in attracting foreign funds. Additionally, economists argue that a high discount rate especially as of today when rates are near zero in the rest of the world makes the cost of borrowing too high for local businesses that are unable to compete both in the domestic and international markets. This is amply borne by the recently released SBP report which states that "firms heavily utilised Libor-based foreign currency (FE-25) loans, and relied less on expensive rupee denominated loans as well as concessional facility of SBP (Export Finance Scheme). In contrast, the financial position of non-exporting sectors remained generally weak. In H1-FY20, the firms had leveraged excessively to address their cash flow constraints emanating from inventory build-ups and higher raw material and operational costs, which had inflated their financing expenses in subsequent months." Needless to add, the International Monetary Fund (IMF) programme agreed on 12 May 2019 was designed to depress aggregate demand through contractionary fiscal and monetary policies while the massive depreciation due to the adoption of a market-based exchange rate led to higher cost in rupee terms of imports of raw materials and semi-finished products while also pushing up the government's debt (each rupee loss vis-a-vis the dollar adds 100 billion rupees to government debt).

The question is whether the one billion dollar inflow, one would assume mostly in short-term government debt securities, strengthen the rupee? On Friday 17 April, the day after the MPC lowered the rate to 9 percent the rupee-dollar parity was 166.3, however, by close of business quite inexplicably the rupee strengthened in the interbank to 163 against the dollar - a move that prompted market players to suspect that there may have been some intervention to shore up the exchange rate. Given that the government needs the fiscal space to engage in relief activities in the aftermath of the coronavirus, the market expects a further cut in the discount rate in weeks to come.