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The State Bank of Pakistan (SBP) tweeted: "as Pakistanis all over the world celebrated country's Independence Day #RoshanDigitalAccount crosses the historical milestone of 2 billion dollars in deposits."

Roshan Digital Account (RDA) was launched in October 2020 with the objective of integrating the Pakistani diaspora with Pakistan's banking and payment system. A resident Pakistani was allowed to open an account with a non-resident Pakistani being the primary account holder; in the event of death of the primary account holder the account would have to be closed and a new non-RDA account opened for the secondary account holder. In other words, Hussain Nawaz as a non-resident Pakistani could open an RDA account with anyone resident in Pakistan though it would be fair to assume that he would be as reluctant as would a local bank for such a transaction.

Two months later, in November 2020, Naya Pakistan Certificates (NPCs) were launched defined as sovereign instruments issued by the government offering attractive risk adjusted returns over different maturities, available in conventional and Shariah compliant versions and administered by the SBP. The eligible were non-resident Pakistanis as well as residents who had declared their assets abroad and the profits on NPCs were to be subject to a 10 percent withholding tax - full and final. And of course as was the case with foreign currency bearer certificates RDA and NPC are fully repatriable.

The rate of return if requested in US dollars for three months was 5.50 percent, for British pound 5.25 percent, for Euro's 4.75 percent and for Pak rupees as high as 9.5 percent. This pattern was consistent with the annualized rates of return on these four currencies as per the following table:

==========================================================================
Tenor                PKR Rate       USD Rate       GBP Rate       EUR Rate
==========================================================================
3 Months                9.50%          5.50%          5.25%          4.75%
6 Months               10.00%          6.00%          5.50%          5.00%
12 Months              10.50%          6.50%          5.75%          5.25%
3 Years                10.75%          6.75%          6.25%          5.50%
5 Years                11.00%          7.00%          6.50%          5.75%
==========================================================================

Three observations are in order. First and foremost, the incentive to take profit in Pakistani rupees is 4 percent higher for all tenors relative to US dollar, though there are variations for the British pound (4.25 for 3 months tenor to 4.5 for 5 years) and Euro (4.5 for 3 month tenor to 5.5 for 5 years). These differences no doubt are based on the demand and supply of these currencies in the local market and one may safely assume are appropriate. Second, RDA and NPCs are not remittances, a desired form of foreign exchange inflows after exports, but debt (with an associated regular payment for use of the asset as well as payment of the entire asset on maturity) and therefore are appropriately parked in the SBP financial account. The total interest payable on the 2 million dollar inflows will be determined after SBP reveals details as to the tenor of the accounts.

And finally, though they are not remittances they are certainly preferable to "hot" money inflows, the target of SBP pre-pandemic monetary policy which accounted for the 13.25 percent discount rate (effective 20 July 2019 to March 2020) that stifled economic activity in the country. The assumption here is that a Pakistani-descent account holder would not be as quick to withdraw his cash if a better opportunity presents itself in any other part of the world or, equally importantly, if the market perception as to the performance of the economy nosedives, relative to a foreign portfolio investor - the main source of hot money inflows. However, anecdotal surveys reveal that the decision to support one's country or to invest with the objective of meeting one's family's future requirements are mutually exclusive with the latter prevailing in nine times out of ten cases.

Be that as it may, on 12 February 2021 Governor SBP Dr Reza Baqir stated that RDA was based on Prime Minister Imran Khan's vision who wanted to connect overseas Pakistanis with Pakistan banking - a vision which prompted the SBP to set up a team for the purpose. By April Prime Minister Imran Khan formally thanked Dr Baqir while launching Roshan Apni Car and Roshan Samaji Khidmat accounts (with a list of charitable organizations where donations could be made including ehsaas programme and Shaukat Khanum). Members of the executive and senior SBP officials are agreed that the rise in RDA deposits reflects the overwhelming support of overseas Pakistanis for Prime Minister Imran Khan, a support based on his honesty.

This may well be however the Prime Minister would be well advised to compare it with a somewhat similar scheme in India (in force since 2011) which also witnessed a surge in deposits by Non-Resident Indians (NRIs) during April-August 2021 - to 6.04 billion dollars compared to only 2.5 billion dollars during the same period in 2020, as per the Reserve Bank of India (RBI). India offers three types of accounts to its NRIs: (i) Foreign Currency Non-Resident account with interest aligned with global rates (which are as low as less than one percent in US dollar, nearly zero on yen and euro and almost 0.03 percent on British pound) it is little wonder that it attracted negative flows-a situation that would of course change if there was fear that the rupee would depreciate massively. Pakistan is offering rates well above six to seven times what is on offer to Indians; (ii) Non-Resident External account is income sourced from country of residence and the entire amount can be repatriated though not more than one million a year; this is tax free however Pakistan has levied a 10 percent withholding tax; and (iii) Non Resident Ordinary account can be opened from income arising in India for example rent income, dividends, interest.

Unlike SBP, India has released details of these three accounts which are as follows:

==========================================================================
NRI deposit inflows into India 2020-21 ($ million)
==========================================================================
2020-21                  FCNR            NRE            NRO          Total
                (not taxable)  (not taxable)        deposit
==========================================================================
April                   -1132           1954            102            924
May                      -237           1230            126           1119
June                     -414            828             74            488
July                      161           1545            371           2077
August                   -149            485            -81            255
==========================================================================

So why did NREs surge until July 2021; and declined in the current month? Executive Director and chief financial officer RBI Ashutosh Khajuria did not attribute any political reasons for the rise and instead argued that: "This year has witnessed an entirely different phenomenon because of the Covid-19 pandemic. A good number of NRIs have returned to India in those Vande Bharat Mission flights. They wanted to come back, to closely observe and watch the developments and then take a call whether to continue in the overseas territory or repatriate for good.... Before they came back, they first remitted the funds. Whatever foreign currency is to be sent to India, normally people keep it in NRE because it is repatriable. In NRE, if you want to take it back, you can take it back. As they do not hold citizenship of those countries and stay there only for job/business, it may not make any sense to hold foreign currency funds there...... This was true particularly for the Gulf region as those NRIs cannot get citizenship there."

The strength of India's economy almost certainly accounts for the offer of the same rates of interest as globally, albeit tax free, compared to Pakistan; and Indian discount rate of 4 percent is also significantly lower than Pakistan's 7 percent which may also be a determining factor. While these very differences may account for the 2 billion dollar inflows, and rising, yet it must be borne in mind that these are a lot lower than the rise in Indian inflows.

To conclude, one would have to request the SBP to release data on the tenor of these inflows and of course wait for a post-Covid19 scenario (with no likelihood of yet another wave) before making a more informed assessment with respect to the sustainability of these inflows.

Copyright Business Recorder, 2021

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