The burn of hot money

[Mav3rick]

What are you smoking? PMLN govt was never taken down. It completed its full term from 2013 to 2018.

We can either be honest and candid or we can do what you are doing. However, in the later, you would win with experiance so please try to be honest and candid instead.

The elected PML PM was taken down over a visa when no financial wrong doing could be proved against him. Now trust me when I say this that it is an entirely different argument whether NS is corrupt or not and my opinion, based on my witnessing of their lifestyle, is that they are all corrupt to the core and that financial corruption could still be proven with independent forensic financial auditors and not NAB or FIA.

But, the strongest point in my entire post was the fact that a PM was removed in a controversial manner which kick-started the downward spiral and thereby my blame on the Architect and his Tool.

How is FDI connected to PM? It is connected to govt policies. Even with PM removed, govt policies remain the same.

FDI is dependent not only on the Government policies but also the overall situation of the country; the way an elected PM was being dragged, along with many of his closest associates and family members, the unrest it had already created and the expected unrest and uncertainty played the part. And this is the reason that I disagree with the way NS was removed and PML subsequently cheated of its mandate in 2018 elections, the entire situation could have been avoided with proper planning by the Architect instead of rushing into things headfirst. The transition of power should have been gradual, casual and stable.

Lol. So if removing NS was a such a bad move due to instability it causes, how come removing IK is such a great move to fix Pakistans economy? Won't there be instability in Pak now if IK is removed just to fix economy?

Where did I ever say that IK should now be removed? He should never have been entrusted with the responsibility and the dignity of the PM office. However, now that he is the PM, he should serve out his period. However, the Architect needs to ensure that he places those people in the economic team who can steer the ship out of the storm, again very gracefully and with stability. The incumbent Finance Minister, of the infamous PPP era, is evidently unable to handle the problems and IMF imposed Governor and Deputy Governor of the Central Bank aren't helping either. In my opinion, Dr. Ishrat Hussain is a much better choice.

You cannot set fix price for PKR. It needs to determined by market forces. All the problems country had with its external account was due to PKR being set at some predetermined price by state bank or finance ministers.

You did NOT answer my question.

Lol. Investment means a country, company or institution from outside brings money to the country in hope of generating profits. Investments are shown as growing forex reserves in external account.
Whereas import means a country buys something from outside by selling its forex reserves. Imports are shown as diminishing forex reserves in external account.
In shot investments mean dollars coming in the country. While imports mean dollars going out.
Now explain how massive CPEC related imports are "investments"?

Are you deliberately being childish?

Is it considered investment only if the finance comes from outside the country? A country cannot invest its own money on projects which are expected to generate income???? Is CPEC NOT supposed to generate a LOT of revenue, both in terms of USD and PKR for Pakistan? USD through transit fee, Ship docking/undocking fee, storing and forwarding fee and other duties; and PKR through increased business along the entire route from the Ships coming in and going out to all the freight trains and trucks etc.

Lol. Trade deficit is part of current account. Any huge deficit in trade will reflect in huge current account deficit.

I can understand you are having a very hard time trying to understand certain things and I am trying as patiently as I can and made it as simple as I could with the following:

"Trade Deficit is of no consequence because we can always plug the gap with Remittances, which has always been the case; CAD is a concern because Remittances can only do so much and so if Remittances + Export = CAD then there is NO problem even if there is Trade Deficit......get it?"

I wonder what is so hard to understand in the above as I had not disputed the fact that deficit is a part of CAD but merely explained that Trade Deficit is inconsequential if we can plug the gap some other way. Let me explain again:

Let us say that our Import Bill is 'I' Billions and out Export Invoice is 'E' Billion and because our imports are more than exports so the CAD is:
CAD = I - E {Total Bill of Exports - Total Invoice of Imports; which is unbalanced}

Now, assuming that imports cannot be reduced (for explanation of the case here), what are the ways to plug the CAD? In this case CAD can be plugged with other sources (if available) and/or with Loans. In our case we do actually have another source which is the remittances (R) that our overseas Pakistanis send to Pakistan and so using that the CAD becomes:

CAD = X - (Y + R) {which is still unbalanced}

In our case, generally, is 'R' enough to plug the gap entirely? No it is not because without a solid export oriented base, we are still importing more and so CAD is ultimately settled with debt/loan (L) as:

CAD = X - (Y + R + L) {which is now balanced}

Lol. Pakistans total earnings from exports (22 billion USD) and remittances (20 billion USD) is equal to 42 billion US. With 60 billion USD record imports in 2018, gives a current account deficit of 60-42 = 18 billion USD. This deficit is covered through borrowing from IMF and other external sources, building up country's external debt each year. This is not rocket science. Simple maths. That's the main reason why PKR was massively devalued to stop these mass imports that should not have happened in the first place.

So you do how CAD and TD work. But don't be fooled into thinking that PKR was devalued because of that simply because the moment PKR is devalued, our external debt because X times more expensive for us to pay as our currency loses its worth by that much. It is a criminal move to devalue the currency and that too by that much and that quickly.

Coming back to the Debt problem, the correct way to resolve it is by:

1. slowly and gradually bringing USD around Rs. 120 mark
2. slowly and gradually discourage import of luxury items through much higher taxation; however essential imports such as Computers, Industrial Electronics and Machinery should be tax free for a few years until an Industrial base is established.
3. slowly and gradually start increasing our remittances through banking channels by encouraging Overseas Pakistanis to do so through ease of transfer, speed of transfer, with minimal paperwork and without unnecessary fee.
4. slowly and gradually start increasing our exports focusing more on quality products for Europe/Americas and quantity for Asia and Middle East.

It doesn't matter who that economist was. What's important is that his calculations was right along. Pakistan did get around 20 billion USD deficit as PMLN govt left, leaving behaving massive debt repayments and a country on the verge of bankruptcy.

Well then the economist must have been a PTI's financial hitman and must have insider information how PTI would destroy the economy in the first 6 months to the point where our country would be in this position. PML, quite understandably, had other plans.

At least I am trying to reason with him, and not calling him names.

And thank you for that; evidently someone is missing someone very close, which I categorically state I have not eaten.

If USD is around PKR 50, then Pakistani exports wont remain competitive. Remember what happened to Pakistani exports when your smart govt artificially set USD to 104 PKR for 4 years. Exports fell massively during that time and only started to increase when PKR was devalued.

Then how come Indian exports are still so attractive even though Indian Rupee is almost twice as strong as PKR? The same is the case with Bangladesh which has a much stronger Taka and yet exports over twice what Pakistan does.

The reason for decline in exports under PML Government and PPP Government is because of lack of electricity, we had none and so mos of the industry had to rely on much more expensive diesel generators which made their products more expensive. And still we could not complete the demand because it was just not feasible for business to keep their generators running 24/7 and so many shifted their work to outside Pakistan. Now that we have surplus energy, we can bring it all back and attract even more.

There was a massive shortfall of 20 billion USD in current account when PTI govt took over due to 60 billion USD record imports in 2018. Pakistan's major imports are petroleum based products and they cannot be taxed so much to reduce CAD. Luxury items are already taxed too much.

How much was the CAD in 2016, in 2017 and 2018? You need to compare PML's Governance at the peak of their tenure vs when the Architect moved in for the kill. And you also need to consider Reserves held with Pakistan when you speak of CAD because with 12 Billion Reserves and 20 Billion CAD the shortfall is a mere 8 Billion in reality.

Well, we can learn to live without luxuries for a few years.

That's what they planned to do. Their finance minister on record said he would:

The external current account deficit rose to $14bn in the first 10 months of the 2018 financial year, a 50 percent rise from the same period last year.

"[Pakistan's] growth has been accompanied in the past 18 months with an increase in macroeconomic imbalances," says the World Bank's Armos. "These imbalances will need to be corrected […] we think that further adjustments will be needed to put the economy on a much stronger footing, narrowing fiscal deficits and a combination of policies to reduce the trade deficit."

The outgoing government, however, said it was not worried.

"We are borrowing from the international market, and there is no difficulty in that, and we will be borrowing again," said Ismail, the outgoing finance minister.

In May, days before its term was completed, the government announced it would be taking an additional loan of up to $2bn from Chinese lenders in order to avert a balance of payments crisis.
https://www.aljazeera.com/indepth/f...ers-economic-growth-cost-180625090954388.html

Miftah Ismail a Finance person? He was a retard. Ishaq Dar was the genius who should have been allowed to serve all 5 years.

Nevertheless, there was no need to return to IMF with the way things were until 2017. But, I suspect the new Government in 2023 will need a much much bigger IMF loan to help Pakistan avoid default, if we haven't already defaulted by then.

I don't need your respect when you blindly worship those that nearly bankrupted Pakistan:

The PML-N says it will focus on increasing exports if it returns to power, but analysts warn, that it may not be enough.

"If the past is anything to go by, then the present appears to be taking us back towards the IMF," says Hussain.

"This is how it has always worked, for the last 20 years we have seen this pattern. Reserves rise for a period, then they hit a peak, and then as they fall they do not autocorrect."

Opposition leaders, too, have been pointing to rising debt levels as the government struggles to control macroeconomic imbalances as being of significant concern.

"It is pretty much in the same spot that we were five years ago, except this time as we get ready for a new bailout, we are starting with a current account deficit which is far bigger, and a significantly larger external debt," said Asad Umar, of the opposition Pakistan Tehreek-e-Insaf (PTI) party.
Pakistan's PML-N delivers economic growth, but at what cost?

Every successive Government may need bigger loans and they will all blame their predecessors. The bigger loan, for the millionth time, is not of concern otherwise US, China, Japan etc., would have set themselves on fire by now! The concern is bigger CAD which needs to be plugged and planning needs to be made for short term (balancing), intermediate term (debt retirement) and long term (debt free).

 

[Norwegian]

CAD = X - (Y + R + L) {which is now balanced}

Yes CAD is balanced through loans from international institutions each year. Loans that need to be paid back with interest through depreciation of PKR and inflation.

So you do how CAD and TD work. But don't be fooled into thinking that PKR was devalued because of that simply because the moment PKR is devalued, our external debt because X times more expensive for us to pay as our currency loses its worth by that much. It is a criminal move to devalue the currency and that too by that much and that quickly.

PKR is devalued to curb the massive import bill as overvalued PKR at 104 / USD for 4 years by your very smart finance minister emptied Pakistan's foreign reserves. So it is not criminal move to devalue PKR and let it float freely through market forces. What in fact is criminal move is artificially setting PKR price at 104 / USD for 4 years and then burn billions of USD from the treasury to defend that artificial price.

 

[Mav3rick]

Yes CAD is balanced through loans from international institutions each year. Loans that need to be paid back with interest through depreciation of PKR and inflation.

You are forgetting Remittances which play a big role and the role can further be expanded by simplifying banking remittances rather than hundi/hawala.

PKR is devalued to curb the massive import bill as overvalued PKR at 104 / USD for 4 years by your very smart finance minister emptied Pakistan's foreign reserves. So it is not criminal move to devalue PKR and let it float freely through market forces. What in fact is criminal move is artificially setting PKR price at 104 / USD for 4 years and then burn billions of USD from the treasury to defend that artificial price.

I think increasing of taxes and duties on imported items should have been the preferred choice for arrest of increasing import bill simply because devaluing the currency impacted not only unnecessary items but also necessary and critical items such as Petroleum products, Machines, Computers & Electronics, Cars, Medicine & Raw Material etc. All countries fix their conversion rate to their advantage, China & Japan are prime examples of countries which keep their currencies artificially weak as they have massive export oriented industries.

We too could have allowed free float of currency but only after we had established an industry with indigenization and localization. I will give you just 1 example out of dozens, of Car Import: we should first have ensured establishment of local industry and manufacturing of Cars before allowing the currency to devalue and/or discourage import of cars through other means (higher taxes etc.). Because of devaluation, the cars which were available for around 2.5 million in 2017 is selling for 4.5 million today.

 

[ejaz007]

Betting on hot money
Nasir JamalUpdated January 27, 2020
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The foreign portfolio investment (FPI) in short-term government debt in recent months has spawned a controversy and debate on the potential benefits and risks of such flows.

Popularly known as hot money, global capital inflows were recently a target of criticism by Princeton economist Atif Mian. In a long thread posted on Twitter, he essentially cautioned the State Bank of Pakistan (SBP) against the accumulation of short-term, risky (external) borrowing, stressing the need for re-profiling it to long-term debt as “Pakistan’s debt (already) has the lowest maturity among its peers”.

Dr Mian went on to point out that the “unregulated capital inflow can build dangerous external liabilities that whiplash the economy and severely constrain the central bank (as) East Asia learned it the hard way in 1998, (and) Mexico before that etc”.

In the same thread, he made another important point: with little confidence that Pakistan will be insulated from external whiplashes (because of its habit of relying on the accumulation of external borrowings for short-term economic boost, which has repeatedly led it into IMF programmes), long-term investment does not happen.

ARTICLE CONTINUES AFTER AD
Foreign portfolio investment has strengthened the value of the rupee and built the SBP’s foreign exchange reserves

According to the latest SBP data, FPI flows into short-term treasury bills stood at $2.6bn while those into longer maturity Pakistan investment bonds (PIBs) were just $35.8 million, helping the government finance its budget. Another $558m found its way into equities. FPI inflows, according to financial analysts, have significantly helped strengthen the value of the rupee and build the SBP’s foreign currency reserves.

Few will dispute his advice to discourage short-term debt and portfolio inflows and encourage long-term capital formation by attracting foreign direct investment (FDI) with proper valuation protocol and technology transfer.

But what other choices does the government or the central bank have at this early stage of economic stabilisation to finance the budget and build foreign exchange reserves? Not many. Growth in exports remains anaemic, remittances are unlikely to increase quickly and FDI is not flowing into Pakistan because of the same reasons that Dr Mian listed in Twitter thread. On top of that, the authorities are unable to meet the tax collection target owing to numerous reasons, slowing economy being one of them.

Ahmed Jamal Pirzada, a Bristol University economist, argues that the accumulation of FPI is actually a reflection of the fiscal problem. If the government gives up on raising revenues via FPI, how and where will it get money to finance its expenditure, with tax receipts already falling short of the target?

Indeed, trade-offs aren’t easy. Increasing taxes at a time when the government is already struggling with the revised target is not possible. Another way is to cut development spending. Lastly, if the government borrows more from banks, it will crowd out the private sector and the borrowing from the SBP will produce more inflation.

“Which of these (options) is better than FPIs in the current scenario?” Mr Pirzada asks and goes on to suggest that the medium-term solution lies in reforming state-owned enterprises (SOEs), simplifying tax laws and policy and expanding the tax base. The unfortunate part is that not much ‘appears’ to be happening towards this end.”

Unless the country sorts out the fiscal mess, the problem/risk will keep appearing in one form or another — in the form of FPI, more arbitrary taxes or a liquidity crunch in the banking system, he says. He is spot on because any movement in any of these directions will further dampen growth, which is already projected to slow down to 2.4pc this year.

There’s no doubt that the “easy come, easy go” hot money flows pose new challenges to the economy and the central bank. Nonetheless, these global short-term capital flows, in spite of a higher cost they entail, did rescue the SBP and the cash-starved treasury running out of fiscal and monetary space at a time when other options could prove to be dearer and riskier.

The SBP may still have some space left to attract short-term external liabilities, but this cannot go on forever. Pakistan’s bonds, in spite of an upgrade of its negative economic outlook to stable by Moody’s and Fitch, still fall in the junk category. Even a small event on the fiscal side can make hot money flee at the expense of the external-account stability.

We have seen this in the recent past as imprudent fiscal and monetary policies pursued by the previous government landed us in this mess and led to adjustments that are proving extremely painful for people as well as industry.

A sound fiscal and external-sector management demands a faster increase in the country’s external debt maturity and exports as well as measures to attract longer-term, stable FDI to ward off the future boom-and-bust cycles.

In an email response to a couple of questions from this correspondent, Boban Markovic, an economist for the Middle East, North Africa, Afghanistan and Pakistan region at the Institute of International Finance (IIF), says a tighter monetary policy and the sharp depreciation of the rupee have reduced Pakistan’s external vulnerability. “Achieved results in economic stabilisation have to be maintained by prudent policies, even after the IMF programme ends. This is an ongoing process given Pakistan’s structural deficiencies.”

Beyond the near term, he expects economic activity to pick up gradually. “It is important for Pakistan to continue improving the business environment in order to attract FDI into high value-added sectors and to stimulate exports… a lot more needs to be done to create the business environment conducive to export-oriented economic growth.

Published in Dawn, The Business and Finance Weekly, January 27th, 2020

https://www.dawn.com/news/1530657/betting-on-hot-money

 

[ejaz007]

Hot money outflow: cool down!
By BR Research on March 16, 2020

Last week was a nightmare for global financial and commodity markets. Pakistan was no exception. Trading in stock market was halted thrice as volatility was high. With the emerging phenomenon of portfolio investment (hot money) in government debt market, the currency and bond markets in Pakistan are no longer insulated from global shocks.

The so-called hot money is also a regular feature in stock market, but the outflows in a short time are usually lower in terms of dollars, but the impact on index is high. Bond market movements have varying impact. The outflows are higher in terms of dollars, but their impact on yields is lower. Since the reserve base is thin, any sudden outflows can jolt the currency market.

SBP's total reserves were $12.8 billion on 6th March. Market intelligence revealed that portfolio investment outflow was $800-850 million in the last week (9-13th March). Official numbers are showing lower quantum as rest will be settled this week. Total outflow in March alone is over $1 billion from $3.1 billion at the start of the month.

The outflow is around 2 percent of tradable government security market, thus there is no major dent in bond pricing. But in terms of SBP reserves, the amount is 8 percent and that has jolted the currency. On Monday, the outflow was $350-400 million, and the currency moved by 1.5 percent. The slide in the PKR against USD is at 3 percent for full week based on weighted average rates of 6th and 13th March.

The currency movement risk of portfolio investment has been highlighted by many pundits. It is a legitimate risk and currency market strength was tested last week. The good news is that for most of the week, SBP did not intervene and market buffers were enough to manage the sudden outflows. Currency movement is based on demand and supply and it depreciated due to abrupt demand.

SBP has been insisting for the last few months that there is enough cushion to manage outflows in hot money. SBP's announced policy is of a market-based exchange rate with intervention only to address disorderly market conditions. Last week was an extreme situation and SBP intervention was warranted to reduce volatility.

After the central bank intervention, currency in the second half on Friday moved back and is likely to open around PKR 157-157.5/USD today. It is hard to say how the currency market will move in days to come. It all depends on how global markets behave. If there is more blood on the streets, one can expect more outflows from portfolio investment in days to come. Currency could remain in pressure. SBP may intervene again.

The institution told BR Research that “SBP is monitoring the situation closely and remains ready to take any actions needed to address disorderly market conditions". The important point is that the current market volatility in Pakistan is driven externally and underlying fundamentals have not changed due to COVID-19.

This implies that when the dust settles on COVID-19 panic, the flows are likely to revert, even if the interest rates are cut. These funds see the real interest rates based on forward looking inflation. The inflows came in at real rate of 1-2 percent and these will stay till the real rates are in this vicinity. Now if the oil prices remain low while the global markets recover, Pakistan credit risk could improve given it is a net importer. This may result in higher flows coming in Pakistan as compared to earlier flows.

https://www.brecorder.com/2020/03/16/580403/hot-money-outflow-cool-down/

 

[shah_123]

Dollar ended $162.50 yesterday -- Hot money flying away.