Qudsia Bano

Pakistan's Roshan Digital Account (RDA) inflows saw a significant decline of 6% in April 2024, falling to $171 million from $182 million in March, according to the data released by the State Bank of Pakistan (SBP), reports WealthPK. This drop comes amid the backdrop of mounting economic instability and stringent import restrictions — the factors that experts say are eroding the investor confidence. The RDA, introduced in September 2020, was designed to attract foreign investment by offering up to 8% profit on US dollar investments, a highly competitive rate internationally. Despite this, April's figures highlight a troubling trend as the country struggles with multiple economic challenges. Experts point to a confluence of issues undermining the RDA's effectiveness. "The economic instability, characterized by fluctuating exchange rates and an unpredictable fiscal policy, is a primary deterrent for investors," said Dr. Siddique Malik, an economist at the Pakistan Institute of Development Economics.

"Moreover, import restrictions and limitations on profit repatriation exacerbate the situation, creating an environment of uncertainty," he said. The SBP's measures to bolster the country's reserves by curbing profit repatriation have also had unintended consequences. "While the intention behind these restrictions is understandable, they have significantly dampened the investor sentiment," said Dr. Ibrahim Khan, former economist at the World Bank. Pakistan's policy interest rate, currently at 22%, has made domestic bonds, particularly T-bills, highly attractive, with cut-off yields of around 21%. However, this has not translated into a proportional increase in foreign investment. "The high yields are overshadowed by the risks associated with the broader economic environment. The investors are hesitant due to the instability and the government's approach towards dollar repatriation." The looming threat of a sovereign default in June 2023 added to the already precarious situation.

Despite securing over $9 billion with assistance from the IMF and friendly nations, Pakistan's foreign exchange reserves remain insufficient to restore investor confidence fully. Compounding these issues is Pakistan's inability to improve its international credit ratings, which were downgraded by major rating agencies amid the default scare. "Lower ratings and instability of foreign exchange reserves have made foreign investors wary of entering the Pakistani market," said Khan. Despite record returns on domestic bonds, the SBP's restrictive policies on repatriating dollars have deterred the existing foreign investors from reinvesting their profits. Interestingly, the equity market has surged, attracting foreign portfolio investments. However, this alone is insufficient to counterbalance the decline in RDA inflows. "The equity market's performance is a positive sign, but it's not enough to offset the overall negative sentiment driven by other economic factors," said the World Bank former economist.

Credit: INP-WealthPk