Hot money outflows

The stock market is cratering, and foreign investors have pulled over a billion dollars from the country because of the Covid-19 crisis. Somewhere, economists are having a depressing told-you-so chuckle. The amount of ‘hot money’ in Pakistan had always been of concern to economists that prioritised stability, especially given the absence of an environment that could help convert that hot money into long-term investments. With foreign investors pulling over $1.388 billion from the country’s capital markets just this month, of which hot money outflows were around $1.28 billion, it is clear that the short-sighted efforts to attract such investment have backfired.

Some may say the coronavirus pandemic could not have been predicted. True, but that is why variables need to be accounted for. War, natural disasters, and infrastructure failures are all looming low likelihood threats which would have caused similar outflows, yet policymakers don’t seem to have considered them. The sell-off is part of a global retreat from emerging markets. Investors have moved over $30 billion from riskier investments to currency markets in the past 45 days. But only the dollar has been looking safe, as it moved to all-time highs against several currencies.

Last week, the banking trade group International Institute of Finance said cumulative outflows in 2020 are higher than the peak days of the global financial crisis in 2008 and at least 10 times worse than during the Asian financial crisis. This has put the squeeze on central banks in countries such as Pakistan, which has relatively high foreign debt obligations and needs stable investment to grow. The global collapse was enough for the SBP to finally cut interest rates, but even then it was by just 0.75%. A reminder, Pakistan attracted this hot money by offering some of the highest interest rates in the world. This crippled domestic borrowing, but boosted government reserves. Economists who noted the risk at the time were ignored. Even now, the only way to replace the hot money with real investment is to make domestic borrowing cheaper, but the SBP is terrified by the risk of even more hot money leaving the country.

Published in The Express Tribune, March 22^nd, 2020.

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