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Foreign Currency Deposits and International Liquidity Shortages in Pakistan

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  • Abbas Mirakhor
  • Iqbal Mehdi Zaidi

Abstract

This paper studies the implications of foreign currency deposits (FCDs) for international liquidity shortages in Pakistan. The analysis focuses on how the large volume of FCDs and the specific institutional characteristics of those deposits have made the Pakistan economy highly vulnerable to exogenous shocks. The analysis shows that FCDs created another channel for government borrowing, and fiscal sustainability in a "closed" system may be very different from sustainability in a more "open" system. There is a need to think of these issues in terms of total balance sheet vulnerability, and we recommend measures that would make domestic-currency-denominated assets attractive to investors.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/167.

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Length: 39
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/167

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Keywords: Capital account liberalization; Dollarization; external borrowing; capital inflows; capital markets; international capital markets; balance of payments; external debt; central bank; international capital; current account; foreign capital; domestic currency; reserve holdings; indexation; international capital flows; reserve accumulation; domestic agents; foreign capital inflows; reserve assets; debt service; public debt; current account deficits; capital flows; indexed bonds; access to international capital; foreign debt; liquidity crises; short-term capital inflows; current account deficit; capital inflow; access to international capital markets; private creditors; domestic borrowing; credit rationing; debt market; debt servicing; domestic savings; capital account transactions; public and publicly guaranteed; exogenous shocks; currency crisis; short-term capital; currency mismatches; debt sustainability; currency risk; current account balance; inflation rate; capital outflow; capital market; capital account convertibility; currency crises; capital mobility; private credit; short-term debt; current account adjustment; external borrowings; domestic saving; debt instrument; external shocks; domestic creditors; domestic debt market; capital account crises; persistent fiscal deficits; central banks; domestic debt; capital controls; public sector debt; indebted country; highly indebted country; sovereign bond; foreign currency debt; debt overhang; excessive volatility; debt rescheduling; private debt; current account adjustments; open capital markets; payment arrears; speculative attack; credit market; capital account restrictions; debt obligations; private inflows; international capital market; capital accounts; official creditors; external resources; hoarding; capital accumulation; private external debt; domestic financial market; private sector debt; stabilization policies; commercial debt; debt problem; currency debt; stock market; productive capital; speculative attacks; public finances; total external debt; reserve holding; public debt management; first generation model; debt situation; external debt situation; medium-term debt sustainability; private foreign capital; long-term debt; domestic financial markets; external financing; debt relief; bilateral debt; debt burden; commercial bank loan; excess liquidity; external indebtedness; hedging; escrow accounts; government deficits; debt management; external debt servicing;

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  1. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  3. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  4. Ricardo Caballero & Arvind Krishnamurthy, 2004. "Exchange Rate Volatility and the Credit Channel in Emerging Markets: A Vertical Perspective," NBER Working Papers 10517, National Bureau of Economic Research, Inc.
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  6. Bartolini, Leonardo & Drazen, Allan, 1997. "Capital-Account Liberalization as a Signal," American Economic Review, American Economic Association, vol. 87(1), pages 138-54, March.
  7. Ricardo J. Caballero, 2003. "The Future of the IMF," American Economic Review, American Economic Association, vol. 93(2), pages 31-38, May.
  8. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," Working Paper 97-16, Federal Reserve Bank of Atlanta.
  9. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  10. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
  11. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
  12. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
  13. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
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Citations

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Cited by:
  1. Rubina Hassan, 2011. "The Reserve Equation and the Analytics of Pakistan’s Monetary Policy," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 111-142, Jan-Jun.
  2. Irfan ul Haque, 2011. "The Capital Account and Pakistani Rupee Convertibility: Macroeconomic Policy Challenges," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 95-121, September.
  3. M. Idrees Khawaja & Musleh-ud Din, 2007. "Instrument of Managing Exchange Market Pressure: Money Supply or Interest Rate," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 381-394.

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