Foreign Currency Deposits and International Liquidity Shortages in Pakistan

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.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