KARACHI: High yields and tax-exempted profits could attract foreign investment to Pakistan, bankers and financial experts said, though it can only happen once the country manages to secure a $1 billion loan from the International Monetary Fund (IMF).

In a recent auction to raise domestic debt, the government raised Rs258 billion via Treasury bills at cut-off rates of as high as 20 per cent, triggering speculation that the State Bank of Pakistan (SBP) may also raise the policy rate by 200 basis points from the current 17pc in an off-cycle review.

In another move, the government has exempted profits from investments in domestic bonds. On Friday, the finance ministry said that for non-resident institutions, the tax would be exempted on capital gains on investments in debt instruments.

Bankers said the current Treasury returns for non-resident institutions were highly attractive and tax exemption on profits had improved the borrowing appetite.

A Treasury bill is a certificate representing a loan to the federal government that matures in three, six or 12 months. In contrast, the long-term Pakistan Investment Bonds (PIBs) mature in three, five, 10 and 20 years. Because these certificates carry the full backing of the government, they are viewed as the safest investment.

“The Ministry of Fina­nce has sharply increased interest rates to lure in hot money again, with some talk of capital gains tax exemption, making it even more attractive,” said Faisal Mamsa, CEO of Tresmark, a terminal that tracks live prices of financial markets. “If the IMF comes in, inflows will gather momentum,” he said.

He said high interest rates on the local currency were also attracting dollar holders to offload their portfolio as the cost of carry was now substantial.

The SBP data shows that foreign exchange reserves held by commercial banks came down from $5.623 billion on Feb 3 to $5.468bn on Feb 17, a drop of 2.76 per cent. This indicates that dollar depositors have converted their savings, probably due to higher interest rates and to capitalise on the dollar rally.

In 2020, Pakistan attra­cted more than $4 billion in investment in Treasury bills and PIBs, but most of the investment evaporated within few months after the emergence of the Covid-19 pandemic.

Published in Dawn, February 26th, 2023