KARACHI: With the fiscal year 2021-22 (FY22) nearing its end, March and April suffered the effects of the political crisis as foreign investors did not invest in domestic bonds, while outflows made the situation worse.

The latest data issued by the State Bank of Pakistan (SBP) on April 30 showed no inflow during the month of April. The previous month, March, was also almost empty. Before the start of the political crisis that resulted in the change of government in Islamabad, Pakistan received over $25 million in inflows in treasury bills (T-bills) and $5m in Pakistan Investment Bonds (PIBs) in February.

Despite the change of government in Islamabad, the situation is surrounded by uncertainties as reflected by the protests, the prolonged oath taking of the chief minister of Punjab and the long march call given by the ousted political party.

If the situation persists, the remaining two months of FY22 are likely to be without foreign investment in domestic bonds. The SBP has further increased the returns on T-bills and PIBs in the recently held auctions.

The SBP on April 28 increased the benchmark six-month T-bills rates by 114 basis points to 14.99 per cent — a move which was beyond the expectations of the financial market.

The cut-off yield on T-bills hit a 22-year high. The benchmark six-month T-bills’ return of 14.99pc is seemingly highly-attractive to foreign investors and is more than the returns when it was introduced by the SBP three years ago. The country succeeded in attracting over $3.5bn but the Covid-19 pandemic created havoc globally and the investment disappeared within a few months.

This time, when the situation is relatively better and most of the world has come out of the pandemic, the record high 14.99pc returns on T-bills have no attraction for investors because of political instability in the country.

The loss of the attraction is also due to uneven domestic economic indicators. Inflation has been rising each month, and to counter the inflation, the SBP has been increasing the interest rate. In the first week of April, the central bank increased the benchmark interest rate by 250 basis points, to 12.25pc, to counter the growing inflationary pressure. However, the government had to increase the cut-off yields on T-bills to borrow from banks.

The T-bill rates rose to 22-year high, again pushing the government to bring the interest rate close to the T-bill rates. The cut-off yield on six-month T-bills is now higher by 274bps when compared with the SBP’s current policy rate of 12.25pc.

The latest data shows that April inflation was 13.37pc, indicating that the real interest rate is negative by 1.12pc. If the SBP further increases the interest rate, it will badly hit trade and industry as the costly money would reduce demand. The International Monetary Fund also wants to reduce demand to cut inflation and control the expanding fiscal deficit.

The two months — May and June — could prolong the empty period of FY22, which will hit the country’s economic and business image on the global map. In this case, the government will have to borrow more foreign currency to meet its growing demand for trade and current account deficit.

Published in Dawn,May 3rd, 2022

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