Hot money attraction.

• Author: Asghar, Arooj
• Position: Pakistan's Carry Trade

Byline: Arooj Asghar

It is important for the government to revive the economy but it is equally important to attract foreign investors to invest in the country. Economic team of the government has recently visited US and Europe and tried their best to convince and attract foreign investors to invest in government treasury bills and bonds because lending rates in Pakistan are currently very high. Interest rates in Europe and US are not so high therefore, foreign investors can get higher returns by lending money to Pakistan because of high interest rates whereas Pakistan would get foreign currency, which will help building its foreign reserves.

This is technically called Carry Trade and is also known as Hot Money. Hot Money means is a trading strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return. Pakistan is already attracted around USD400 million as Hot Money from international investors. SBP officials believe that Pakistan can get up to USD 2 billion as hot money in next few months whereas Ministry of Finance is also finalizing the issuance of Euro Bonds with very attractive rate of return.

Now the question is how can a foreign investor invest in Pakistan with volatile exchange rate even if interest rates are so high. The simple guess is, dollar rupee exchange rate will not move significantly in next 12 months or so. This is also evident from the current trend. Dollar is appreciated by 2 paisa, rupee is depreciated by 10 paisa, these are the levels when rate is determined by the so called market with hidden interference of the central bank.

The logic behind this point is simple, government and SBP are approaching international investors to invest in treasury bills of Pakistan which is rupee-dominated instrument without any provision of forex hedge. Therefore, it is implied that there would be an understanding among the parties that dollar rate will not change thus providing enough confidence to the investors to take the currency risk unless unexpected development happens.

Most likely government will try to keep the dollar rate static as did by the previous government meanwhile, foreign investors will invest in treasury bills for few months, and will take their principal back along with abnormally high returns, while forex rates would remain at the level when they actually invested. The additional benefit for the investors would be if rupee is appreciated by the time they...