ISLAMABAD: The government has permitted resident Pakistanis, having offshore bank accounts, to invest in diaspora bonds, which may allow people to channel their money from offshore tax havens and foreign currency accounts maintained with local banks.
Pakistanis have nearly $7.5 billion in foreign currency accounts but domestic commercial banks pay less than 1% interest on these deposits. The government’s decision to allow resident Pakistanis to invest in diaspora bonds has offered an opportunity to these people to take their money abroad and bring it back through an offshore account to earn up to 6.75% interest.
The decision may promote dollarisation of the economy as resident Pakistanis, who would opt to invest in Pakistan Banao Certificates, will be paid up to 6.75% return in dollars. It will also help meet the core objective of attracting dollars from those sources that are already not part of the central bank’s reserves.
The Pakistan Tehreek-e-Insaf (PTI) government had hoped that overseas Pakistanis would help in a big way to overcome the external-sector problems. But it seems that the PTI has lost hope and has decided to allow resident Pakistanis to invest in Pakistan Banao Certificates.
In the past, resident Pakistanis were not allowed to invest in dollar-denominated Euro and Sukuk bonds.
But Rule 6(a) of Pakistan Banao Certificates’ rules says, “Pakistani individuals having Computerised National Identity Cards” are eligible to invest in the bonds.
State Bank of Pakistan chief spokesman Abid Qamar confirmed that the resident Pakistanis having bank accounts outside Pakistan could invest in Pakistan Banao Certificates. He said the remittance for investment in the certificates would originate from the investor’s own account outside Pakistan.
Instead of only inviting overseas Pakistanis, now resident Pakistanis can also invest in the three-year paper at 6.25% interest rate and in five-year bonds at 6.75% return. The minimum investment size is $5,000 with no upper limit.
The lucrative rates may also fetch a portion of remittances and export receipts, which would partially affect the primary objective of attracting dollars that were not already in the Pakistani system.
According to information shared by the Organisation for Economic Cooperation and Development (OECD) with the Federal Board of Revenue (FBR), there are 152,000 offshore accounts of Pakistani citizens. The government has not inserted any safety clause into these rules, which could stop people from investing black money in Pakistan Banao Certificates.
The accounts maintained by resident Pakistanis can be used to invest in these certificates, according to legal experts and banking industry people.
Similarly, the money parked in foreign currency accounts opened with commercial banks under the State Bank of Pakistan (SBP) Circular FE25 can also be channelled by local Pakistanis to earn hefty profits.
The SBP cannot bar these people from channelling their money due to the legal protection available under the Foreign Currency Protection Ordinance of 2001. “No person holding a foreign currency account shall be deprived of his right to hold or operate such an account or in any manner be restricted temporarily or permanently to lawfully sell, withdraw, remit, transfer, use as security or take out foreign currency there from within or outside Pakistan,” says Section 3 of the ordinance.
The central bank has already used FE25 accounts to meet its balance of payments needs.
As of December 2018, the central bank borrowed $7.55 billion from commercial banks under the forward and currency swap arrangements, according to the SBP data. The central bank was required to return $1.76 billion within one month, $3.32 billion in two months and remaining $2.5 billion in one year, according to the official data.
The huge foreign swap exposure has turned the central bank’s reserves negative. In addition to the $7.55-billion swap exposure, the SBP owes $3 billion to China, $3 billion to Saudi Arabia, $1 billion to the UAE and $700 million to other sources, according to the sources. This has resulted in negative $7 billion net foreign currency reserves of the SBP.
The government has launched the diaspora bonds to raise funds for external financing needs. But up to 6.75% return is higher than the price at which Pakistan issued the last two bonds of the same tenor.
The bonds have been launched to raise funds for current account deficit financing as gross official foreign currency reserves of the central bank stood at $8.2 billion, which are not enough for even seven weeks of imports.