Paving the road for hot capital in Pakistan?

The latest developments allude to govt's intent to raise borrowing cheaply and in dollar terms. Cabinet had recently approved direct borrowing from the banks instead of the usual competitive bidding. That is inefficient but way to attract dollars.

Simultaneously, foreign non resident banks are now exempt from paying taxes on capital gains (previously 10% WHT on capital gains). This way, govt can directly borrow from foreign investors in local debt markets at a notionally cheaper rate (since after tax returns are higher).

Putting domestic investors at a strategic disadvantage, govt was willing to do whatever it takes to get dollars in the country. However, IMF has lately objected to the direct borrowing plans perhaps due to fiscal imprudence moral hazard. Between the lines, govt's harsh tone against banks for manipulating FX has also moderated.

During Reza Baqir's tenure, govt was able to borrow heavily at 13% when Fed rates were near 0 so the after tax differential was 11.5sh%. Now, at 19-20% borrowing tatr when Fed is 4.5%, the after tax benefit hovers 14 to 15%.

Despite the yield kick, attracting investors in Rupee denominated asset class would be a task. A lot of reputational damage has been done to Pakistan over the few years as macro economic and political noises make headlines among tight global conditions. If successful, can lure $1-2b at a high cost. Good luck.