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Foreign investors put in millions of dollars in Pakistan govt securities

Net inflows in Pakistan's T-bills during first four days of October stood at $89 million

Foreign investors put in millions of dollars in Pakistan govt securities

From July 1 to Oct 4, foreign investors bought treasury bills worth $572 million

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Foreign investors have thronged to invest in Pakistan's short-term government securities, with accumulation during the first four days of the current month reaching to a gross $125 million.

Foreign investors bought treasury bills (T-bills) worth $125 million in the first four days of October, while bills worth $36 million were sold, showing net inflows of $89 million, according to data from the State Bank of Pakistan (SBP).

From July 1 to Oct 4, foreign investors bought treasury bills worth $572 million and sold T-bills worth $279 million, with net investment during the period amounting to $292 million.

Global monetary easing

Analysts say the primary reason inflows rose was because of a global cycle of monetary easing, with key central banks slashing interest rates in recent months, while rates in several developed and emerging markets are already in the single-digit range.

Meanwhile, the US Federal Reserve gave signals of a further interest rate cut while announcing monetary policy last month when it decreased the rate by 50 basis points after four years. Observers expect another rate cut of around 25bps.

The Bank of England might also cut interest rates by a quarter percentage point to 4.75% next month. Inflation in the UK peaked at 11.1% in October 2022, and has now fallen below 2% after 3.5 years.

Pakistan's interest rate is still at 17.5%, among the highest in the region. Meanwhile, India's interest rate is steady at 6.5% and Bangladesh's at 9.5%.

Shifting strategy

In the last treasury bills auction on Sept 18, the State Bank received bids worth PKR 860 billion, with bids of PKR 152.6 billion for three month, PKR 223.2 billion for six month, and PKR 484.5 billion for bills having 12-months tenor.

The bank rejected all bids for the three-month papers, reflecting the government's strategy of shifting the debt profile towards longer tenors.

The SBP successfully raised PKR 244 billion against a target of PKR 250 billion where the cut-off yield for the six-month papers stood around 14.398% — the lowest since April 2022 — while the cut-off yield for the 12-month bills came in at 13.735%.

The steep decline in cut-off yields along with the expectation of a further decline in inflation has created more room for interest rate cuts, helping the government to buy back treasury bills for the first time.

In two turns, the State Bank of Pakistan bought treasury bills worth PKR 826 billion at an average cut-off yield of around 16% whereas the securities were sold around 20-21%.

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In a recent report on Pakistan, the International Monetary Fund said that Pakistani authorities are committed to bringing core inflation down and re-anchoring inflation expectations.

In this regard, policy rates will remain substantively positive in real terms and data-dependent to adjust quickly to evolving price dynamics.

At the same time, to support monetary policy formation and implementation, the inflation expectation survey will be aligned with best practices.

More broadly, reducing fiscal dominance and credit objectives will be conducive to stronger monetary transmission and foster financing deepening and allocative efficiency, including by (i) limiting public sector borrowing demands through fiscal consolidation; (ii) retrenching from credit allocation, such as via SBP’s refinancing schemes, allowing a broader role for market forces; and (iii) relinquishing state ownership of financial institutions.

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