A sigh of relief is being noticed among pundits. It is loud and clear that we don’t earn enough – in rupee (fiscal) and in USD (external debt) – to put the country on a sustainable recovery path.
While aggressive danda-nomics has proven productive to bring USD from Rs335 to Rs290 in open market, the fundamental change is warranted. Why not create a formal high-yielding instrument for the government to borrow USD domestically?
First, speculators, elites and hoarders in Pakistan keep USD and gold as an inflationary hedge against the rupee’s free fall. Higher USD returns would offer investors currency depreciation protection plus nominal profits on their savings.
Second, granted the rate of return on such USD debt would be higher than borrowing from multilaterals but can be priced less than Naya Pakistan Certificate’s 8-9% and linked to the Secured Overnight Financing Rate (SOFR) plus 2-3%. That is a phenomenally good borrowing cost for a junk-rated country whose long-term bonds are offering USD 20% per year.
Third, USD lying under the carpets and in lockers can be productively placed in formal banking channels encouraging tax compliance, documentation and enhanced availability in the financial system. With better transparency, the elite or middle class (with declared wealth) can very well enjoy higher returns.
Fourth, there are numerous large-scale projects requiring USD imports that can enhance the country’s long-term exports, dollar savings and import substitution.
Corporations are already finding it much difficult to borrow from foreign lenders, including friendly countries. Why not borrow USD from Pakistanis at home and offer USD 10-12% internal rate of return (IRR) to them?
Fifth, instead of creating a parallel grey market where USD is exchanging hands unofficially, higher returns on USD-denominated domestic bank accounts will serve as a disincentive to keeping USD away from official channels. This can create healthy competition to lure USD deposits at attractive rates.
Sixth, extra liquidity in the system can enable the State Bank of Pakistan (SBP) and commercial banks to meet their borrowing and client needs to enhance trading business. Additional USD flows can complement the government’s eventual plan for a freely floating currency.
Seventh, to enhance deposits offer them the rupee convertibility option. At maturity, the conversion to the rupee should offer 2-3% extra yield. For additional protection, investors can be offered convertibility option.
Eighth, tax rates on such USD deposits should be flat and nominal of 10-15% instead of the astronomical rates charged currently. The idea is clear; make it easier. Don’t tax the already taxed or overly tax the rich either.
Last, with an embedded dual currency option, investors can get the best of both worlds. For instance, if the dollar deposit yields 8% but in that year, the currency remains stable with 0% depreciation and the government’s T-bill borrowing cost is 15%, investors can be offered to pick the rupee 12-14% (higher USD return than what they would have earned with USD deposits). It would be a win-win for the government and the saver.
There is going to be immense pressure on policymakers to arrange non-debt creating USD inflows, primarily through remittances, exports and foreign direct investment (FDI). However, sweeping USD from the grey market can easily add $400 million to $1 billion every year by formalising the high-yield USD deposits.
It’s time to disincentivise the grey economy and document USD holders once and for all.
The writer is an independent economic analyst
Published in The Express Tribune, October 9th, 2023.
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