FOREIGN investment of about $3.5b in government securities over the last one year had helped the country build up its foreign exchange reserves and stabilise the rupee. However, problems associated with these risky inflows have now started come to the fore.
The rupee depreciated in recent days as foreign investors pulled out almost $ 600m over the last two weeks. This unloading has been triggered due to panic caused by the Corona Virus outbreak and has battered markets all over the world. In the days ahead also, these outflows are likely to continue and one has to see how it affects local currency and the stock market. In fact there are always substantial risks and problems associated with these inflows of hot money. These global short-term capital flows did rescue the SBP and cash-starved treasury running out of fiscal and monetary space at a time when other options could prove to be dearer and riskier but we also need to be mindful that these inflows pose new challenges to the economy.
Since economic situation stands stabilised with inflation also showing signs of decline, therefore, in our view, government must now take steps towards encouraging long-term capital formation by attracting foreign direct investment (FDI). This can only be done by reducing interest rates to a reasonable level, as is the case in our neighbourhood. This is the only path through which we can encourage our private sector to expand their businesses and revive industries. This in return will help us achieve sustainable economic growth and provide more job opportunities to our youth.
