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Higher remittances are going into dollars and CDs

These and other modes of investment are attracting individuals and institutions as the money market remains flush with cash, and the yields in other areas are either peaking off or have started causing apprehensions about their future profitability. The capital gains and dividends from corporate stocks, that have seen a boom since January this year, can flatten in the future, some stock market analysts fear.

But, other analysts insist, the benchmark Karachi Stock Exchange index KSE-100 that is now hovering around a life-time record of 4,500 points still has a lot of potential and it may move towards 5,000. This is despite recent interruptions that brought it down to 4464.78 points this week. Marketmen, however, describe it as "technical corrections" in an overbought market. One worrying thought, however, is the near-record rate of interest being charged on Carry Over Transactions (COT), locally called 'badla' that finances short-term share purchases on credit. COT rates, this week, soared to 17.0 per cent, raising investors' and KSE management's eyebrows.

Real estate, the other investor favourite, is now seeing a decline in values. Real estate businessmen in the financial and business hub of Karachi say, the property prices in the posh Defence Housing Authority and other fashionable residential and businesses areas has declined upto 20 per cent just in the last few weeks. More declines may follow, some property business analysts fear. Real estate in Karachi and other major cities like Lahore and Islamabad, has been the chief attraction for overseas Pakistanis, including those working in the Gulf, Saudi Arabia, Middle East and North America, who contribute bulk of home remittances.

Be it real estate or the booming stocks, there were more than one reason for large chunks of investment inflows into them since 9/11. Most of the expatriates feared, their money in foreign banks may be frozen on one pretext or the other by US- led cash flow monitoring. They also realised that sooner or later, they will return home, where they should have a place of their own to live.

At the same time, the interests rates, they were offered by banks overseas, declined, too, over the last two years, making foreign deposits unattractive. In fact, besides the expatriates, the resident Pakistanis also started bringing their money home from abroad - the phenomenon, Finance Minister Shaukat Aziz calls, "the reverse flight of the capital." Although interest rates and profit on forex and Pakistani rupee deposits has also been declining but the rates still were better than those offered abroad. Then there is the chicken-and-egg question. While larger inflows of home remittances-that doubled to $4.3 billion in fiscal 2003, compared to 2002 - helped the rupee appreciate more than 11.6 per cent in nearly two years, it was no longer attractive to keep money in greenbacks at home or abroad. The rupee ruled the roost-until now. But, some weeks ago, it started weakening against the greenback. It has, once again, made dollar an attractive investment. Added to the regained strength of the dollar, is the fact that stocks and real estate had become atrociously expensive to invest, particularly for medium and smaller investors. The bigger players, still continue to play games with stocks and anything else they can lay their hands on.

The greenback, for nearly six months, narrowly moved between Rs57.70 to 57.85 in the interbank market. It can be described as the official rate, by virtue of financing nearly 95 per cent of all regular transactions. The banks are quoting the dollar at Rs57.92/57.72.

The kerb market on Sept. 4 quoted the dollar at Rs58.10/58.15.

The most important domestic reason for people, once again, to getting attracted to investing in dollars is the fact that the deposit or profit rates offered by banks to savers have rapidly declined to a pittance over the last two years. The savers now get an average 1.90 per cent a year-down from the still paltry 3.20 per cent in January this year. The current inflation rate is close to 4.0 per cent. It means, the savers are loosing more than 2.0 per cent through the inflationary erosion. Although the Ministry of Finance, and Dr Ishrat Hussain, Governor State Bank of Pakistan (SBP), the central bank, maintain that inflation is being kept under check, but the drastic decline in the bank deposit rates has forced the savers to convert their rupees into dollar accounts.

This phenomenon started eight months ago, co-inciding with a major decline in profits on savings. If and when the stock market boom flattens, financial analysts believe, more people are likely to convert their rupees into dollars.

It will be a major reversal of the two year old phenomenon that had led people to convert their dollars into rupees as the domestic currency was appreciating and the greenback was declining.

Already, the greenback deposits have risen to $ 2.36 billionby end-July, up from $ 2.063 billion at end-January. The renewed attraction to invest in dollar is substantiated by the fact that as the greenback started appreciating against the rupee, the state-owned National Bank of Pakistan was reportedly asked to sell dollars in the market to bring its rate down. But, it had no significant impact. Again, SPB action against money changers, allegedly involved in forex smuggling, too, did not really impact the dollar price.

SBP and the stock market regulator-Security and Exchange Commission of Pakistan (SECP) now have established a task force to eradicate, what officially is described, "illegal brokerage and forex activities." SBP Governor Hussain and SECP Chairman Dr. Tariq Hasan, have jointly announced, they have "devised a coordinated strategy to deal with "illegal brokerage and forex activities, including deposit-taking from the general public at fixed returns, future currency trading, commodity futures trading and index trading."SBP and SECP have " comprehensive functional and institutional powers to take action against these companies and will ensure that irrespective of the legal forms of these businesses there is no jurisdiction gap and nobody can escape the ambit of law."

Why are the moneyed people doing such things? The fact is that there is hardly anything to invest-in in Pakistan. No new industry is coming up. No new shares, stocks or businesses are being floated for the last five years.

Since, what I will call, "the supply-side of investment" is offering nothing attractive, the demand-side is strong with large inflows of home remittances, among other factors. In view of this major supply- demand gap, people are investing in anything they can lay their hands on, be it old, over-priced and even second-string stocks, or the real estate, and now the greenbacks.

An evidence to illustrate this point is that the banks have large piles of liquidity with hardly anyone to borrow-even at the historically the low interests rates of as low as 4.0 per cent. This is a far cry from 22 per cent interest rate that was common in 1999.

In view of this, the SBP is moving ahead with the launch of certificates of deposits (CDs). It appears, it is even slowly raising the yields on the government paper like Treasury Bills (TBs). SBP hopes that CDs will help banks place their surplus funds, and curtail the present level of their liquidity.

It will also enable the banks not to resort to further cuts in deposit rates for the savers in order to provide funds to potential borrowers at reduced interest rates. The SBP, it seems, has now, even though belatedly realised the pitfalls of letting banks reduce deposit rates that are not only adversely hitting the level of savings, but also punishing savers who relied on profits from the banks for their livelihood. Zafar Sheikh, SBP's head of treasury says, "the CDs will help banks to do prudent interest rate management." CDs are considered to be a market- based instrument supplementing statutory reserves.

It seems, the yield on the government paper like Treasury Bills (TBs) and Market Treasury Bills (MTBs) may also be gradually increased, in order to help banks get better returns compared to the all-time lows since earlier this year. SBP auctioned MTBs worth Rs19.48 billion, Sept. 3.

The weighted average yield is expected at 1.3772 per cent a year - 0.3823 per cent better than the August 6 auction when it was 0.9949 per cent. The average weighted yield on 12-month bills is expected at 1.9296 per cent a year - up 0.5333 per cent, compared to August 6 auction when it was 1.3963 per cent. The yield had declined to 2.0 per cent in March this year, and further to 1.0 per cent recently.