Time to increase returns for local USD holders.

KARACHI -- A sigh of relief is being noticed among pundits. It is loud and clear that we don't earn enough - in rupee (fiscal) and in USD (external debt) - to put the country on a sustainable recovery path.

While aggressive danda-nomics has proven productive to bring USD from Rs335 to Rs290 in open market, the fundamental change is warranted. Why not create a formal high-yielding instrument for the government to borrow USD domestically?

First, speculators, elites and hoarders in Pakistan keep USD and gold as an inflationary hedge against the rupee's free fall. Higher USD returns would offer investors currency depreciation protection plus nominal profits on their savings.

Second, granted the rate of return on such USD debt would be higher than borrowing from multilaterals but can be priced less than Naya Pakistan Certificate's 8-9% and linked to the Secured Overnight Financing Rate (SOFR) plus 2-3%. That is a phenomenally good borrowing cost for a junk-rated country whose long-term bonds are offering USD 20% per year.

Third, USD lying under the carpets and in lockers can be productively placed in formal banking channels encouraging tax compliance, documentation and enhanced availability in the financial system. With better transparency, the elite or middle class (with declared wealth) can very well enjoy higher returns.

Fourth, there are numerous large-scale projects requiring USD imports that can enhance the country's long-term exports, dollar savings and import substitution.

Corporations are already finding it much difficult to borrow from foreign lenders, including friendly countries. Why not borrow USD from Pakistanis at home and offer USD 10-12% internal rate of return (IRR) to them?

Fifth, instead of creating a parallel grey market where USD is exchanging hands unofficially, higher returns on USD-denominated domestic bank accounts will serve as a disincentive to keeping USD away from official channels. This can create healthy competition to lure USD...