ISLAMABAD: Foreign investors have bought over $1 billion worth of Pakistan government’s debt, said Finance Adviser Dr Abdul Hafeez Shaikh on Monday – an amount that is equal to the increase in official foreign exchange reserves in the current fiscal year.
Central bank data showed that the money was predominantly invested in three-month treasury bills, suggesting that foreign investors were still not ready to take long-term risks associated with exchange rate fluctuations.
Foreign investors invested $1 billion in government securities, said the finance adviser while speaking at the Pakistan Innovative Finance Forum, arranged by the Asian Development Bank (ADB) and Karandaaz Pakistan.
The State Bank of Pakistan (SBP) governor was pursuing the policy of attracting risky hot foreign money to boost foreign currency reserves. To achieve that goal, he got sweeping tax concessions approved from the federal government for non-resident companies in September this year.
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The government has cut the withholding tax from 30% to 10% for non-resident companies having no permanent business establishment in Pakistan, being charged on the profit made on the disposal of securities. These foreign investors have been given special treatment on their investments in treasury bills and Pakistan Investment Bonds (PIBs) acquired through the Special Convertible Rupee Account.
The central bank data showed that so far $1.1 billion had been invested in the treasury bills and PIBs. However, the investment in the PIBs amounted to only $3.2 million. In November alone, Pakistan received $630 million worth of foreign investment in the government debt.
Out of the $1.1 billion, the country received $612.7 million from the United States, $466.4 million from the United Kingdom, $5.1 million from the United Arab Emirates, $496,000 from Cayman Islands and $363,000 from Ireland, according to the SBP.
On the back of the $1.1-billion hot foreign money, the central bank’s gross foreign currency reserves increased to $8.4 billion. Had the central bank not followed the policy of attracting the hot foreign money, its reserves would have remained at the June 30 position despite nearly one-fourth reduction in imports.
Although the foreign investment in debt securities has provided a temporary relief for the government, it at the same time can put additional pressure on the foreign currency reserves if the investors decide to pull out their money on maturity.
The $1.1-billion foreign investment has come at the expense of domestic investment and production as the central bank has artificially kept the interest rate high at 13.25% to make foreign investment in debt securities lucrative.
Shaikh said the central bank was independent in making decisions on the exchange rate and monetary policy.
The previous Pakistan Muslim League-Nawaz (PML-N) government had also built the foreign exchange reserves by heavily relying on short-term foreign commercial loans. Federal Minister for Economic Affairs Hammad Azhar said last week that the repayment of short-term loans increased the government’s debt repayments significantly.
Shaikh also spoke about the economic challenges and a brief respite in tough economic conditions.
“The government inherited a threatening economic situation and it had to take tough decisions to restore stability,” remarked Shaikh. “We are beginning to see signs of restoration of economic stability.”
He said for the first time the primary budget surplus was achieved in first quarter of the current fiscal year while the current account also posted a surplus in October.
“Everything is not rosy, as high prices, creation of more jobs and achieving sustainable economic growth are key challenges for the government,” he added. The finance adviser vowed that the government would surpass the 2.4% economic growth target agreed with IMF.
The de facto finance minister said the government had managed to achieve 16% growth in tax collection, adding that the target of Rs1.2 trillion in annual non-tax revenue would also be crossed by a wide margin this year.
The adviser emphasised that there was a need to strengthen the institutions for private-sector participation. “How to make coordination among key stakeholders better is also a challenge,” said Shaikh.
It was challenging to have better coordination between the centre and provinces, between the federal government and international financial institutions and among various government departments, said the finance adviser.
“If we can get project readiness and approval systems improved, the ADB can invest more than $2.5 billion per year in developing key infrastructure and services in Pakistan,” said ADB Country Director Xiahong Yang.
Published in The Express Tribune, November 26th, 2019.