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Dawn Editorial 19 January 2020

Hot money

CONCERNS are increasing among some sections of the business community that the large amounts of foreign investment flowing into local currency government debt securities could tie the State Bank into high interest rates for a longer period, because if rates were to be reduced, this money would run for the exit. Additionally, the foreign investors parking their funds in Pakistan government treasury bills are betting that for the duration that their money is there, an exchange rate depreciation will not take place. Exchange rate movement is one of the key risks faced by all foreign investors, whether in financial instruments or fixed investment, and given the sum of $2.225bn that has come into treasury bills this fiscal year, exchange rate depreciation would wipe out a significant chunk of the profits that have been made.
For the most part, these fears are overstated. This is the first time Pakistan’s local currency debt instruments have seen such large foreign participation and the phenomenon is new to most people. As a result, some misunderstandings have also been created. For one, some erroneously believe that foreign investors are getting a return of more than 13pc on their dollar-based investment. The truth is that this is the rupee-based return since the investment is in rupee-based instruments. The dollar equivalent would be much lower. More importantly, others have warned about the danger of ‘hot money’ being fickle and tied to small movements in interest rates. This is a more important concern to bear in mind, especially given that at least some of these inflows are from what the financial services industry calls ‘carry traders’, meaning investors who borrow in one country where interest rates are lower and lend to another where the rates are higher, earning themselves a tight spread in between.
The problem for the State Bank now is the perceptions that are coming up around these inflows. The market is expecting an interest cut between now and March. The banks seem to have other ideas though. The last T-bill auction saw massive participation of more than Rs1.1tr in bids when the target was Rs400bn. However, more than 60pc of all bids were in three-month tenors, meaning the banks are not pricing in an expectation of rate cuts in the few months ahead. Now if the State Bank does not cut rates by March, it could face a mounting chorus of voices saying that the country’s monetary policy has been mortgaged to foreign investors in the government’s hasty search for foreign exchange. This will become more problematic if in the months ahead there is growing recourse to this form of borrowing, which is a possibility. If this trend gathers pace, it could eventually serve as a drag on the economy. Perhaps both the pessimism and optimism around this phenomenon should be curtailed at this point.


Crisis time for PTI

TROUBLE seems to be brewing within the ruling coalition. First the political allies of the government began to grumble. Then PTI members started voicing their own grievances. Soon an MQM minister, Khalid Maqbool Siddiqui, resigned from the federal cabinet. A few days later, PML-Q minister Tariq Bashir Cheema opted out of a federal cabinet meeting. Before long, the PTI’s own minister Fawad Chaudhry fired off a letter to Prime Minister Imran Khan complaining about the manner in which the Punjab government was being run by Chief Minister Usman Buzdar. Suddenly, it seemed the ruling coalition was on the verge of splintering. Initially, the government did not take matters seriously, but once the fissures started appearing in public, Mr Khan launched a damage-control exercise. PTI delegations led by Federal Minister Asad Umar and Mr Khan’s close aide Jahangir Tareen started calling on allies from the PML-Q, MQM, GDA and the BNP-M to hear their grievances and find an amicable solution. Recently, a PTI delegation held talks with the MQM in Karachi but was unable to convince Mr Siddiqui to take back his resignation. Not only do these hurried moves signal panic within PTI ranks, they have also revived concerns that the consensus around Mr Khan’s government may be loosening. These concerns have increased with ministers such as Mr Chaudhry becoming very vocal in their criticism of the government. It is only with the support of its allies that the PTI has been able to form governments at the centre and in Punjab. The numbers game in Islamabad and Lahore paints a precarious picture for the PTI, and if its allies abandon their support, both PTI setups could face an existential crisis.
So what has triggered this sudden crisis? Tension between political allies is a fairly common phenomenon but in Pakistan ruling parties have had enough resources to negotiate their way through such times. The surprising aspect this time, however, is why three key government allies — the MQM, PML-Q and the GDA — have chosen to air their grievances almost simultaneously. The timing of this crisis has triggered speculation that the allies’ unhappiness may be coordinated to exert maximum pressure on the PTI. This pressure is felt most by the Punjab government. Calls for Mr Buzdar’s ouster have been steadily growing but the prime minister has refused to replace him. Will Mr Khan be forced to make compromises in order to find a way out of this crisis? That will depend on who blinks first.


Pakistan Super League

ALREADY excitement levels are soaring as the Pakistan Super League cricket carnival prepares to launch its fifth season a month from now. Six star-studded teams — the Multan Sultans, Karachi Kings, Islamabad United, Lahore Qalandars, Quetta Gladiators and the Peshawar Zalmi — will be competing for supremacy, with the bumper winner’s purse in excess of a quarter of a million dollars. The icing on the cake this time round, however, is that the entire PSL will be staged in Pakistan for the first time ever since the event’s inception in 2016. The league will see all its 34 matches played in four Pakistani cities including Karachi, Lahore, Rawalpindi and Multan, culminating in a grand finale in Lahore on March 22. The relocation move from the UAE, for which the PCB and the government deserve much credit, will hopefully further enhance Pakistan’s status as a safe country following the return of Test cricket to home soil after almost a decade. The fact that the PSL has evolved into a global event is evident in what observers predict — that the viewership may well cross 70m this season. Indeed, with every season, the league has become bigger and better, attracting leading players from Pakistan, the West Indies, South Africa, New Zealand, Australia, England, Zimbabwe, Afghanistan, Bangladesh and other nations, besides drawing top sponsors, broadcasters and, most importantly, fans.
However, the PSL has had its share of controversies; it must guard against them and make the event incident-free this time. The nasty ‘fixing’ scam in 2017 involving four players jolted the league. The PCB needs to have stringent measures in place in order to avert similar mishaps. It should also ensure that all foreign players feature in the games. Their abrupt pullout last year from matches in Pakistan because of security fears came as a huge disappointment to local fans and sent the wrong message to the international cricketing community. Hopefully, a successful PSL will help allay fears and give everyone much to celebrate amid competitive contests.


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