The government’s current approach to the Naya Pakistan Certificate (NPC), particularly the interest rates on PKR-denominated certificates, requires immediate reevaluation.
Currently, these rates are set at 21.5% for one-year investments, notably higher than the State Bank of Pakistan’s (SBP) policy rate or the one-year T-bill auction rate of 17.5%. This significant difference has opened the door to inefficient arbitrage opportunities, allowing overseas Pakistanis to earn a 4% annual premium—at a substantial cost to the exchequer.
If the higher rate on PKR NPCs is an intentional strategy to attract USD inflows, it may be reasonable. However, if this is not the case, it highlights a delay in decision-making that needs prompt correction.
By reducing the NPC rate and aligning it with more sustainable benchmarks, like the SBP policy rate, the government could lessen unnecessary financial burdens and address systemic inefficiencies.
Furthermore, Pakistan’s Eurobonds are currently trading at yields of 12-13%, reflecting a heightened perception of credit risk. This is a stark contrast to just a few years ago, when bond yields stood between 7-9%. Given that these bonds are denominated in USD, the government faces a significant burden to repay in foreign currency. By contrast, NPC investors converting USD into PKR are more likely to reinvest locally, easing pressure on foreign reserves.
Unlocking the Full Potential of Roshan Digital Accounts (RDA)
Since its launch, the Roshan Digital Account (RDA) program has attracted approximately $8.5 billion in foreign inflows. Notably, around 60% of these inflows have been converted into PKR assets, significantly reducing the government’s need to arrange USD for outflows, as much of these funds are used domestically.
This feature of the RDA program underscores its importance in managing the country’s foreign currency reserves.
To further enhance the impact of the RDA program, the government could consider offering a 1% higher return on USD-denominated NPCs, which would likely attract more foreign investment.
Additionally, simplifying the process for overseas Pakistanis to use the RDA as a savings account for local expenses would encourage greater inflows, increasing domestic liquidity and reducing the need for USD repatriation.
For greater economic stability and reduced financial inefficiencies, it is recommended that the government immediately adjust interest rates on PKR NPCs to align with the SBP policy rate or one-year T-bill auction rate. Offering slightly higher returns on USD-denominated NPCs could also draw more foreign inflows, supporting broader economic objectives.
The fact that 60% of USD inflows are converted into PKR assets further reduces the need for USD outflows, making this strategy more advantageous for financial stability.
The Larger Economic Context
Unfortunately, Pakistan’s current economic model has fostered a moral hazard, where slow economic growth of 2-3%, coupled with rapid currency depreciation, drives the labor force to seek employment abroad.
To provide some context: in 2008, Pakistan’s exports were valued at $24 billion, while remittances stood at $7 billion (roughly 30% of exports). This year, exports are expected to reach $40 billion, with remittances potentially crossing $34 billion (85% of exports).
Pakistan’s policymakers have historically relied heavily on overseas Pakistanis to fund imports and debt repayment in a heavily indebted country.
For sustainable growth, the country must rejuvenate its domestic economy to attract global talent and capital, thereby creating more jobs, increasing the exports-to-GDP ratio, and reducing import pressures on substitutable goods.
Additional USD inflows from remittances should be carefully managed to build foreign exchange reserves, reduce external vulnerabilities, and improve the country’s creditworthiness. This, in turn, could lead to single-digit interest rates, greater fiscal discipline, a higher tax-to-GDP ratio, and overall socio-economic improvement. Hopefully, these precious dollars will be saved wisely!