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The hot money is getting hotter in Pakistan. At an unprecedented level of $234 million in Sep-19, the year to date inflows under SACRA in government papers (T-Bills only) stood at $327 million in Sep-19 – at this pace the yearly flow could be north of $2 billion. That is a promising start, and Reza Baqir’s policy seems to be yielding results.

In a recent interview to Business Recorder, he said that the amount received so far is nothing as compared to the potential; and he was not concerned with the terminology of hot being used with the portfolio investment. He said that market’s apprehension of the money going out is uncalled for as there is no need to fear about money which has not been flown in yet.

“Pakistan debt market is huge – only the marketable securities are of Rs9 trillion ($57 bn). Foreign investors like big deep markets so they can enter and leave without moving the market”, said the Governor. He has been pitching this to investors in US and so far 86 percent of $326 million came from the US.

The flows so far are in T-Bills, where rates are attractive as the yield curve is sharply inverted after one-year paper. “Our government debt market has a lot of scattered bond issues along the curve. Liability management operations that create deep pockets along the curve would also help to deepen the markets. By doing so, we can provide a good funding base for provision of long-term finance to the private sector. Right now, long-term finance is not that easy to get. Banks are primarily interested in government bonds”, pointed Baqir.

The question is when the money will come in long term bonds. The T-bills are indeed too hot; and the rates might start coming down from Jan or Mar – and what happens after that. In Egypt, the flows at one time, were more than $30 billion and currently stand at $23 billion. This gives some respite that majority of the money is still intact. (For details read “readying for hot money”)

This raises the question whether the interest rates be kept high till the time some desirable level of portfolio investment is fetched. However, the SBP governor said that monetary policy is to be based on inflationary expectations, not flows. But inflation is dependent upon the currency value – “in the near term, the exchange rate is determined a lot more by sentiments and financial flows,” the Governor had noted.

The conjecture is that the currency may remain under pressure till the time reserves are built, and inflationary expectations will remain high till the time reserves are built. And reserves building is contingent upon portfolio investment and other elements. Higher the amount gets in quicker time, better is the chance of stable currency and interest rates coming down. Forget the temperature, let the money flow in.