HIGH interest rates continue to lure foreign investment in government securities and according to SBP (State Bank of Pakistan) data, released on Friday, has almost reached $3b during current fiscal year. These inflows have helped the country build up its foreign currency reserves and stabilise the rupee but there are also substantial risks and problems associated with these inflows of hot money.
Several economic analysts have pointed out the fickle and volatile nature of these funds. These funds can and have caused disruption and upheaval in countries such as Mexico, Thailand and Argentina in their domestic banking system and monetary management by surging inflows as well as bunched outflows. These global short-term capital flows, in spite of a higher cost they entail, 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 and is building external liabilities to dangerous level.
Since government claims to have achieved economic stability, therefore, in our view, it must now move towards encouraging long-term capital formation by attracting foreign direct investment (FDI). Time has come to trigger economic activity in the country and that 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 immense job opportunities to our youth.
