ISLAMABAD, 22 September 2003 — The financial sector in Pakistan is currently seeing several significant developments, some of which will boost, while others will may weaken the economy.
Some of these developments are amazing in view of the fact that no widespread investment is currently taking place and the economy is not totally out of the stagnation that started in mid-1990s. Textiles, with $4.0 billion new investment, including $1.5 billion machinery imports, is an exception. An officially estimated under four percent inflation rate, large foreign currency inflows from overseas Pakistanis and multilateral and bilateral assistance, and a lack of large-scale investment has spurred bank liquidity. That in turn, forced commercial banks to lower their lending rates.
The positive factors appearing on the economic horizon are the proposed issuance of “jumbo bonds” in the domestic and “dollar bonds” in the global market. The concessional export refinance facility has been further extended. The government paper is likely to attract better yields after seeing historic lows.
But there are big questions, too. Is ‘hawala’ or ‘hundi,’ raising its head again? Will more of home remittances shift gears and, once again, move from official banking channels to the kerb? Why is the home remittance boom faltering? Will skyrocketing stocks, owing to lack of new floatations, now, take a pause?
Faced with huge bank liquidity, and finding no takers even at the historically lowest interest rates of below 4.0 percent, the government, State Bank of Pakistan (SBP), and commercial bankers are introducing new financial products and loosening the once-horrendous hold on lending. But that has not worked for the last two years.
How to sap up the liquidity?
Finance Minister Shuakat Aziz says, “the government will launch ‘jumbo bonds’ of 15-years tenor, totaling Rs.30 billion to Rs.40 billion in order to pick up some of the excess liquidity.” The jumbo bonds will be a new financial instrument in Pakistan. The launch date and other details are awaited. But, the question is will commercial bankers go for these long tenor bonds in a low-interest environment that currently prevails. Will they not wait for sometime more in the hope that interest rates and yields rise? However, both Aziz and SBP Governor Ishrat Hussain insist a low-interest environment will continue in the foreseeable future. But another instrument may attract foreign investors, particularly, nearly four million expatriate Pakistanis working abroad, particularly in the Gulf, Saudi Arabia, Europe and North America, is the proposed dollar bonds. Aziz plans to launch a total of $500 million of these bonds. The government and the International Monetary Fund are currently engaged in discussions regarding this launch. The greenbacks generated by dollar bond sales will be used to retire some of the costly foreign debt. Pakistan’s total foreign debt as of now stands at $35 billion, down from $38.5 billion two years ago. Part of Pakistan’s current official forex reserves of $11.6 billion will be also be used to pay costly foreign loans. IMF is already asking government of Pakistan question as to why it is acquiring more foreign credits, while it is in fact in a position to offload some of its costly foreign liabilities? In fact Aziz said this week, Pakistan will “repay all expensive foreign loans from the next year.”
In fact, Pakistan is now planning also to place $7.0 billion, out of its $11.6 billion forex reserves into high-yield investment. Ministry of Finance has hired fund mangers Mercer & Russel to advise on this investment.
Commercial bankers who were faced with mounting liquidity, and hardly anywhere to invest, were also facing ever-declining yields on the government paper for the last one year. The yields on the government Treasury Bills (TBs), for instance, had sunk below one percent in recent months. But, SBP and the government have realized that the door on this cheap source of borrowing for the budgetary support, need not be closed. In a partial reversal of its yield-cutting policy, the SBP, this week, allowed it to rise.
In this week’s auction, the average weighted yield on six-month TBs was raised to 1.6072 percent - up from 1.2147 percent at the last auction that took place August 20. “This increase for the benchmark 6-month TBs, can signal yields are going to stabilize at higher levels. Extremely limited investment and lending opportunities, and the continued high liquidity can halt any further substantial rise in the yield that SBP may offer.
But, already the bankers said after the auction that a significant increase in the yields may not be forthcoming. The SBP auctioned 6-month TBs of Rs.14.43 billion. But, the increased yield did not really impact the money market, as the prevailing overnight rates ranging between 0.25 and 0.75 percent stayed unchanged.
What caused the high liquidity? Among other elements, the continued high inflow of home remittances sent by overseas Pakistanis was a key factor for the last two years. The home remittances for instance, in fiscal 2003 that ended June 30, almost doubled to $4.10 billion, from $2.29 billion in 2002. However, now there is a slight slowdown in the remittance sent through official banking channels. The question being asked by the Ministry of Finance (MoF) and SBP is whether the traditional mode of ‘hawala’ or ‘hundi’ is raising its head again after months of remaining comparatively in the low gear? The official suspicion is that an increase of upto Rs.0.75 a dollar, in the spread of the exchange rate offered by the kerb market, as against the banks, is making ‘hawala’ popular again.
The interbank rate for a greenback is currently hovering around Rs.57.78/57.79. But, in the kerb dollar has eased nearly Rs.0.30 now to Rs.58.05/58.00. SBP says overseas Pakistanis sent home $588.1 million in the first two months of the current 2004 fiscal — July and August — a bit lower than $591.51 million in the like two months of 2003. It will closely watch the inflows, and he volume of the incoming dollars that will come through the kerb, and take corrective measures to ensure fuller flows through the banks.
