Pakistan’s debt market sees a resurgence of hot money

Thanks to their attractive returns and stable currency, foreign investment in Pakistan’s Treasury Bills (T-bills) has surged to levels not seen before 2020, according to a brokerage firm study on Tuesday.

The return of hot money is seen in the heightened interest shown by foreign investors in government notes following a four-year hiatus. Pakistan’s assets are increasing as a result of an earlier this month staff-level agreement with the International Monetary Fund to increase financial assistance for the nation.

In March, Pakistan and the International Monetary Fund came to an agreement at the staff level over the second and final review of a $3 billion, nine-month standby arrangement. Should the arrangement be accepted by the executive board of the global lender, around $1.1 billion will be disbursed to the struggling economy of Pakistan.

The State Bank of Pakistan said that between March 1 and March 22, there was a net inflow of $82 million in T-bills. Since January 2024, these inflows have totaled $126 million. $124 million has been received in these inflows throughout the first nine months of the 2023–2024 fiscal year.

During FY20, Pakistan received $612 million in net T-bill inflows; in January 2020, net monthly inflows reached a height of $1.4 billion. In a market statement, brokerage Topline Securities stated, “Finally, with high local interest rates and a stable rupee, smart foreign investors are investing in local T-bills through Special Convertible Rupee Accounts (SCRA)”.

“Countries with high interest rates frequently engage in carry trading. However, it said that investors were unable to participate in this arbitrage in the instance of Pakistan due to political unpredictability and exchange risk.

Topline said, “We believe that more such funds will likely come to Pakistan to acquire high-yielding government papers once Pakistan secures the new long-term IMF deal, thereby providing short-term support to Pakistan’s FX reserves and rupee.”

According to new inflation figures released on Monday, the nation’s inflation rate dropped to 20.68 percent in March—the lowest level in over two years. Higher borrowing prices were the cause of this, which slowed down economic growth and domestic demand.

On March 18, the SBP maintained its benchmark interest rate at a record 22 percent for the sixth consecutive meeting. In response to persistent inflation, the central bank has raised interest rates by a total of 15 percentage points since September 2021.

The March inflation data, according to analysts, marked the start of a positive real interest rate both in the present and in future forecasts. In a report, Chase Securities stated that “the inflation forecast for the coming months is expected to remain subdued due to a notable high base effect,” despite worries about the recent spike in gasoline costs.

It went on, “As a result, expectations are rising for a possible rate reduction in the next monetary policy review.” It is expected that Pakistan would have negotiations with the IMF this month to discuss a longer-term bailout. The nation’s new administration, headed by Prime Minister Shehbaz Sharif, intends to continue the crucial policy changes needed to manage the nation’s mounting debt service obligations, increase foreign exchange reserves, and rein in deficits.