Foreign inflows of $1.2b will help Pakistan's economy: SBP

Central bank defends investment, saying it poses limited risk

KARACHI: The State Bank of Pakistan (SBP) has defended the foreign investment of $1.2 billion in local debt instruments, saying this poses limited risk and will help the domestic economy adopt international best practices.

“Risks posed by such investments (hot money) are limited at current levels,” the central bank said in a statement on Monday.

The current level of such investments at $1.2 billion accounts for less than 2% of the total outstanding marketable government securities and is less than 0.5% of the gross domestic product (GDP), it said.

This investment accounts for less than one-fifth of the increase in the SBP’s net reserve buffers at current levels; “the bulk of the increase in the net reserve buffers is accounted for by the continued current account improvement,” it added.

“Such investors have been able to move capital in and out of our financial markets without problem for the Pakistan economy,” the central bank emphasised.

“The SBP continues to monitor developments in the financial sector carefully and stands ready to take action against any risks.”

Such interest by international investors raises the demand for government securities and accordingly lowers yields and reduces the cost of borrowing for the government, the SBP explained.

“The growing role of international investors in the local debt market may serve as a positive feedback mechanism for further improving domestic practices, policies, systems and institutions in line with the international best practices,” it said.

The central bank pointed out that there are several emerging market economies that have attracted investments from international investors in much greater amounts on a sustainable basis in their local currency debt markets and have used them as a major stimulus in their macroeconomic development.

Published in The Express Tribune, December 17^th, 2019.

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