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January 19, 2020

Ten million jobs or hot money?

Opinion

January 19, 2020

Prime Minister Imran Khan’s goal is to create 10 million jobs. The prime minister’s economic team’s goal is ‘hot money’ (hot money is the flow of funds from one country to another in order to earn a short-term profit on interest rate differences….”). One can either work towards creating 10 million jobs or pursue ‘hot money’ – but not both. PM Imran Khan and his economic team are working at cross-purposes.

Hot money is all about making tons of money on interest rate differentials. Here are the two rates: The London Inter-bank Offered Rate (LIBOR – an ‘interest-rate average calculated from estimates submitted by the leading banks in London’) is at 1.84 percent (three-month LIBOR). On January 15, at the State Bank of Pakistan (SBP), auction results for three-month T-bill came in at 13.47 percent.

In the simplest of terms, you borrow at three-month LIBOR and invest in Pakistan at 13.47 percent-pocket the hefty differential and laugh all the way to the bank. Question: Who does it? Answer: Hedge funds do it (a hedge fund is an ‘offshore investment fund, typically formed as a private limited partnership that engages in speculation using credit or borrowed capital’).

These hedge funds look for three things in target countries: high interest rates; an IMF package in place and laws favourable for hedge funds. Lo and behold, Pakistan has all three: high interest rates; an IMF package in place and laws favourable for hedge funds. As of January 15, foreign investment in our T-Bills had reached $2.2 billion (from a meagre $15 million in July 2019).

Imagine: KIBOR (Karachi Inter-bank Offered Rate), to which most interest rates in Pakistan are tied to, has moved from 5.9 percent in 2018 to 13.31 percent. Imagine: auto loans are now at 28 percent and businesses in Pakistan borrow at KIBOR plus basis. At these interest rates businesses are shutting down – and laying-off people. Remember, one can either work towards creating 10 million jobs or pursue ‘hot money’ – but not both.

In July 2019, the IMF Executive Board approved a $6 billion, 39-month facility. For the record, last year our government allocated Rs1.9 trillion for interest. This year the government has allocated Rs2.9 trillion (because of the increase in the rate of interest). The difference in the amounts allocated for interest comes to Rs1 trillion or $6.5 billion.

Wow, we got a $6 billion, 39-month package from the IMF but spent $6.5 billion in additional interest payments in just one year. Does that make sense? In essence, we are shutting down businesses and laying-off people within Pakistan so that we can attract ‘hot money’ from overseas. Does that make sense?

I hear our economic team’s goal is to attract $10 billion worth of hot money. Paul Krugman, Nobel Memorial Prize in Economic Sciences and Distinguished Professor of Economics at City University of New York, wrote: “….foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.”

Professor Krugman adds: “Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.”

Hot money or 10 million jobs? Which one would it be? So far, the PM is losing and the economic team is winning.

The writer is a columnist based in Islamabad.

Email: [email protected] Twitter: @saleemfarrukh