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Are Naya Pakistan Certificates losing their charm?

  • Experts believe massive outflow in recent months is due to spike in global interest rates and uncertainty over Pakistan's economy
Published November 21, 2022

Spike in global interest rates, and uncertainty over the domestic economy are affecting the confidence of overseas Pakistanis, said market experts, after massive outflows in Naya Pakistan Certificates (NPC) in recent months.

NPCs are USD-, PKR-, Euro- and British Pound-denominated sovereign instruments issued by the government, and aimed at helping the cash-strapped economy attract inflows with overseas Pakistanis being the target market.

In September, in line with the key interest rate, the State Bank of Pakistan (SBP) increased the rate of return for investment in PKR-denominated Naya Pakistan Certificates (NPCs). The Finance Division also notified the downward revision of minimum denomination of NPCs.

The rate of PKR-denominated conventional NPCs was increased by up to 550 basis points (bps); however, the rate of return on US dollar-dominated Certificates remained unchanged.

Now, as per the latest data provided by the SBP, the outstanding position of NPCs, a part of SBP's Roshan Digital Account (RDA) initiative, has declined from a high of $1,423 million on March 31, 2022 to $763 million as of September 30, 2022, a reduction or outflow of $660 million or over 46% in six months.

Outstanding position of NPCs

“Global monetary tightening has led to an interest rate hike by central banks, and the NPCs are no longer offering competitive rates,” a market expert on condition of anonymity told Business Recorder.

“NPCs are mostly dollar-denominated, and the rate was kept unchanged. People are moving towards safer investments. On the other hand, Pakistan’s bond yields are high i.e. offering 40-45% YTM, while risk profiles of the two instruments remain similar.

“Moreover, the domestic political situation has also contributed to the outflow, as the trend began in March 2022 that shows overseas Pakistanis have sort of lost confidence after the change in government.

“The government should increase the rate of return, by at least 5% to attract investors,” the analyst added.

Similar sentiments were echoed by Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited.

“At the time when the central bank issued these dollar-denominated certificates, the global interest rates were almost 0% as compared to 6.5% offered (on 12M NPCs). The country’s euro bond yields were low as well," said Rauf.

“Now, the returns have spiked globally, it is 4-4.5% in the US alone, whereas, the euro bond returns are off the charts.

"Pakistan, on the other hand, has kept the rates of USD-denominated NPCs unchanged. NPCs are no longer an attractive investment option,” he told Business Recorder.

Moreover, the economic slowdown in the country and uncertainty pertaining to rising default risk have also added to investor concerns, added Rauf.

“The marketing of NPCs by the central bank has also reduced recently,” he said.

“The government should increase the rates offered in order to maintain the spread, at least. Otherwise, more outflows can take place."

The decline in NPCs comes as total inflow under RDAs also decreased 13% month-on-month to $146 million in October, down from $168 million in September 2022 and the lowest since December 2020.

Cumulative inflows hit $5.3 billion at the end of October, 26 months since the programme was launched.

The SBP does not publish data on RDA outflow, and instead, reveals gross inflows each month.

The development is a rather significant one for Pakistan that has desperately looked at avenues of foreign currency inflows to shore up its reserves. As of November 11, 2022, foreign exchange reserves held by the SBP amounted to $7.96 billion. Net foreign reserves held by commercial banks clocked in at $5.84 billion, taking the total to $13.8 billion.

A low level of reserves also puts pressure on the currency, which has hit record lows this year only to see some stability in recent weeks. On Monday, rupee fell 0.22% in the inter-bank market, closing at 223.66.

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