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Foreign Currency Deposits and International Liquidity Shortages in Pakistan

  • Abbas Mirakhor
  • Iqbal Mehdi Zaidi

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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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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  1. Leonardo Bartolini & Allan Drazen, 1996. "Capital account liberalization as a signal," Staff Reports 11, Federal Reserve Bank of New York.
  2. 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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  8. 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.
  9. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
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  13. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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