• Monday, August 10, 2020

The burn of hot money

Discussion in 'Pakistan Economy' started by ejaz007, Jan 14, 2020.

  1. ejaz007

    ejaz007 SENIOR MEMBER

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    The burn of hot money
    By Mehtab Haider.
    Mon, 01, 20

    In the blind pursuit of hot money, Pakistan’s economic managers are foolhardily focused on generate dollar inflows by from abroad by selling short-term Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) at higher rates.


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    In the blind pursuit of hot money, Pakistan’s economic managers are foolhardily focused on generate dollar inflows by from abroad by selling short-term Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) at higher rates.

    Exactly, the incumbent regime is following “Egyptian model” for building up foreign currency reserves despite knowing that Cairo was facing catch-22 situation at the moment for doing the same under the guidelines of the International Monetary Fund (IMF) programme. When Egypt had entered the programme by end of 2016, its foreign currency reserves were in the range of $15 billion and under a three-year program of $12 billion they rose to $45 billion. The foreign currency reserves of northeastern African nation increased $30 billion out of which $20 billion were raised through hot money.

    Now Egypt is on the horns of a dilemma because its policy makers are facing a difficult situation to keep this hot money worth $20 billion in the system. Recently, Egypt’s central bank decreased policy rate by 100 basis points that resulted in the exclusion of $1 billion. If their policy rate further reduces then it is feared the accumulated hot money will find any other destination, where the lenders could maximise their profits through short-term investments. Egypt was pursuing this flawed policy when Dr Reza Baqir was working there as IMF’s resident chief before deciding to quit that position to join as Governor State Bank of Pakistan (SBP).

    Pakistan is now following the same policy and in the first few months the country has attracted over $1.5 billion as investment in short-term its debt market.

    Pakistan’s debt market has, so far, fetched around $1.5 billion and $10 million from abroad through the short-term T-bills and PIBs respectively at markup rates that are on the higher side.

    This foreign funding landed in short-term T-bills at a time when the policy rates are persisting at 13.25 percent for a while. It is feared that when policy rates will be slashed down, this money will fly out of Pakistan in search of more favourable destination in any other part of the world. So we will be witnessing quite a peculiar situation when this hot money dries out in case policy rates go down.

    This will incentivise the central bank to keep the policy rates on higher side. It can lead to the creation of a ‘conflict of interest’ for the policymakers, who might prefer to keep the monetary stance tighter in order to keep foreign investments within the system.

    The independent economists’ hue and cry that this blind pursuit for luring hot money at higher rates will harm domestic investment and economic activities is only falling on the deaf ears of the policy-smiths.

    Pakistan’s former economic advisor and renowned economist Dr Ashfaque Hassan Khan said, “There is no rationale behind attracting this kind of hot money”. “There can be a substitute to this highly unpredictable short-term money. The government can launch international bonds such as Eurobond and sukuk bond for a period of five to ten years with single-digit markup rate.” When apprised that federal cabinet deferred Ministry of Finance-tabled summaries for launching international bonds, mainly because certain ministers opposed the proposal following mortgaging motorways, highways, and airport terminals, Khan said it could only be termed as ‘economic illiteracy’ and nothing else. The economist also said the sukuk was an asset-backed bond and many Islamic countries used this instrument to generate dollar inflows.

    There is another element that should also be kept in mind. The government had projected generating $3 billion through international bonds, so if this plan was dropped then the government would have to rely on domestic borrowing for raising around Rs500 billion for financing its budget deficit that would have grown even larger keeping existing higher interest rates in view.

    Out of $1.5 billion inflows into short-term debt market, the bulk of foreign money into T-bills has come from the UK and the USA amounting $746 million and $663 million, respectively.

    Dr Hafeez A Pasha, another top economist of the country, said there was no justification for drawing in hot money at the expense of discouraging private sector investment. “The higher policy rate was also playing havoc with budgetary estimates and increasing debt servicing requirements,” Pasha added.

    Inflationary expectations have been cited as a major cause for keeping the policy rate high. However, the inflation rate clocked in at 12.63 percent but the core inflation has started receding, coming down from 8 percent to 7.5 percent for December 2019.

    When core inflation (non food and non energy) stands at 7.5 percent, there is no justification for freezing the overall policy rate at 13.25 percent other than a means for attracting hot money from abroad.

    The SBP officials do not agree to certain assumptions and argued that the foreign portfolio was a friction to overall investment so the central bank could not be held responsible for protecting friction part of over $1 billion as the sole reason for maintaining a hawkish monetary regime. Now the question arises that: are there any guarantees this friction will remain lower over the next two and half year period? It is feared that it might cross $10 billion to $15 billion -to meet Net International Reserves (NIR) target- under the IMF programme.

    On other hand, the Federal Board of Revenue (FBR) also promulgated Tax Laws (second amendment) Ordinance, 2019. The FBR states that the existing foreign exchange framework of the country allows non-residents to invest in debt securities and government securities through Special Convertible Rupee Accounts (SCRAs) maintained with banks in Pakistan.

    There is no restriction on repatriation of funds from SCRAs, which incentivises investment in the debt market by non-resident investors. Several amendments for encouraging investment in the domestic debt market and simplifying the tax regime for non-resident companies have been introduced.

    This hot money poses risks for Pakistan’s economy and even Humayun Akhtar Khan, chairman Institute of Policy Reforms, who is also a member of the ruling party, has recently cautioned the policymakers against attracting hot money, thus this policy needs to be reversed.

    https://www.thenews.com.pk/magazine/money-matters/597503-the-burn-of-hot-money
     
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  2. S.Y.A

    S.Y.A SENIOR MEMBER

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    Moral of the story: Imran Khan is an idiot who has failed to deliver, and is now doing what ishaq dollar was doing earlier.
     
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  3. Dark-Destroyer

    Dark-Destroyer SENIOR MEMBER

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    Bring back king kong nawaajaaa save Pakistan for ever
     
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  4. Maarkhoor

    Maarkhoor ELITE MEMBER

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    We all bring Niazi.....What happen....to Nia Pakistan?

    They are all useless...until unless we change f@cking system and bring presidential rule.
     
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  5. Enigma SIG

    Enigma SIG SENIOR MEMBER

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    The writer with an MA in Journalism is hardly an authority on money matters; especially economics at country scales.
     
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  6. T|/|T

    T|/|T SENIOR MEMBER

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    With each passing day, its getting clearer that imran khan is incompetent, dumb and a fool. I just hope he doesnt do too much damage is these 3 or so years. I hope we find a new political party where competent people are encouraged.
     
  7. blueazure

    blueazure FULL MEMBER

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    1. this 'casino' model by state bank to steer economy will not work

    2. state bank modus operandi = lower interest rate to boost ( artificially ) growth . ( meanwhile wrecking currency power ) .

    when this cheap money goes into real estate and the bubble bursts( ultimately ) , state bank raises interest rates and kills growth ( only this time, we have a 42 k stock mkt and ppl with no purchasing power ) . the 'hitmen' at IMF must be laughing at the dumb khan

    3. get out while you can from this system . i personally recommend precious metals and cryptos . bank is the last place to keep money
     
  8. FuturePAF

    FuturePAF SENIOR MEMBER

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    Sell the t-bonds are a gamble in the hopes that exports will increase dramatically, and cover the high interest costs of these bonds.

    Real reforms are needed with this borrowed money. the reforms mentioned in the Atif Mian NYT Article need to be evaluated and if found to be with merit should be implemented post haste.

    Money going into the real estate sector is sapping the nations potential, and all for the benefit of a few at the expense of the entire nation.

    If people want to put money into real estate, there should be a premium tax to discourage it, and encourage people to invest into Pakistan’s export earning industries.

    Pakistan can no longer be the free ride for the already rich and well connected, if it is to break free of the IMF cycle. furthermore, the longer Pakistan delays the needed reforms, Pakistan will struggle to keep affording the adequately defend itself against India. Pakistan has to make due with 50 year old Mirages when perfectly good J-10s are available but we don’t have the money.

    it’s a short term sacrifice by the rich and well connected, but it will pay off in a decade, if the Chinese model is followed, and from then on its sustainable growth, with all prospering, especially the rich and well connected. This is the time they need to sacrifice for the nation and their own long term prosperity.

    Also, with our young population, we have another reason to move quick to reform or risk squandering our demographic dividend
     
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  9. Norwegian

    Norwegian ELITE MEMBER

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    When Ishaq Dollar was taking expensive loans why were you sleeping then?

    Like what party? Pmln and PPP had their shot and they blew it
     
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  10. Dark-Destroyer

    Dark-Destroyer SENIOR MEMBER

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    Any tom dick and harry can write a article in Pakistan
     
  11. KhanBaba2

    KhanBaba2 FULL MEMBER

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    Nothing Atif Mian says should be done. In fact the opposite of what he says should be done. He is after all a Qadiani. No true Muslim can do what he tells you to do.
     
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  12. T|/|T

    T|/|T SENIOR MEMBER

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    Do u even read the post before replying? Read again, i said "new" political party.
     
  13. S.Y.A

    S.Y.A SENIOR MEMBER

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    Nope, was one of the few who used to support IK. IK is now doing the exact same things he was doing, taking excessive loans, running to Imf and offering bonds.
     
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  14. Dr-who

    Dr-who FULL MEMBER

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    To all our experts and so called investigative journalist: this is means to an end in financing our defecit in the short to medium term, till then the govt has to strive to increase revenues, increase taxes, stop haemorrhagic corruption, reforms etc. So when the interest rates will drop, and it sure will, all the hot money will vanish and by that time we should hopefully be able to withstand the shock. It's like financing your expenses thru credit card and working hard to repay it, in between if you lose your job then f#@&, otherwise all will be well.
     
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  15. RoadRunner401

    RoadRunner401 SENIOR MEMBER

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    The Central Bank of Egypt slashed again its key overnight deposit rate by 100 bps to 12.25% during its November meeting, as widely expected. This is the third consecutive rate cut, bringing the borrowing cost to its lowest since 2016. Policymakers said the decision provides appropriate support to economic activity, while remaining consistent with achieving the inflation target of 9% (±3%) in 2020 Q4 and price stability over the medium-term, despite the expected impact of unfavorable base effects in the near-term. The annual inflation rate fell sharply to a near 14-year low of 3.1% in October 2019, pushed down by lower prices of food, namely vegetables, as well as the statistical effect of a high base last year. Policymakers also noted that economic growth stabilized to a preliminary 5.6% in Q3 2019, the highest in eleven years. The overnight lending rate and the discount rate were also cut by 100 bps to 13.25% and 12.75%, respectively. Interest Rate in Egypt averaged 11.93 percent from 1991 until 2019, reaching an all time high of 21.40 percent in October of 1991 and a record low of 8.25 percent in September of 2009. source: Central Bank of Egypt



    Mr @S. Y. A, do you know why the money is needed in foreign reserves account? I understand you guys are PML_N workers or supporters, so I am willing to make it even easier to understand what's being done and why, if the above isn't sufficient enough...
     
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