Pakistan is enjoying an unprecedented rush of foreign investment just months after the country secured an IMF bailout package, as fund managers are lured by high interest rates and promises of economic reform. Benchmark interest rates have stood at 13.25 per cent since the last rise in July. One senior official at the central bank said this had contributed to inflows of about $1bn, with more likely to arrive in the coming months.
Analysts at Karachi-based broker Topline Securities expect inflows to reach a record $3bn by the end of the fiscal year to June 2020. The central bank has been “pitching the Pakistani bond market directly” to foreign investors, said Saad Bin Ahmed, equity head at brokerage Arif Habib. “There are concerns that this is hot money, and at a single click this money will go out, possibly when the central bank cuts the policy rate. But my expectation, considering the state of the economy, is that they may not even cut the rates until July 2020.”
Stocks have also pushed higher. The main Karachi stock index is up 13 per cent over the past month, making it the best-performing bourse of 94 tracked by Bloomberg. This year, the government in Islamabad reduced withholding taxes for foreign investors, giving a further boost to sentiment. The inflows come at a time when the central bank is seeking to build up its foreign-exchange reserves.
In July, the IMF formally approved a $6bn bailout package to help Pakistan confront a worsening balance-of-payments deficit. Saudi Arabia’s promise in May to defer annual oil payments from Pakistan of up to $3bn for the next three years has helped to ease pressure on its reserves.
Charles Robertson, chief economist at Renaissance Capital, said the case for buying Pakistan’s bonds was straightforward. “Where else can you get double-digit yield on an undervalued currency?” Mr Robertson noted that the rupee was at its lowest level in 25 years, measured by its real effective exchange rate, meaning foreigners could earn outsized returns on local- currency bonds. This is “the first new emerging market reform story since Egypt in 2016”, he added.
But the president of a privately owned Pakistani bank warned that high interest rates were having a “crippling effect” on investment by domestic companies.
These rates would need to be brought down to encourage businesses to borrow, he added. “The problem is that if you bring down interest rates, that may discourage the inflow of foreign money. It’s going to be a very delicate balancing act.”