KARACHI — Pakistan’s hopes of attracting foreign portfolio investment into government securities took a hit in the first two months of the current fiscal year, as overseas investors pulled more money out than they brought in.
According to the State Bank of Pakistan (SBP), foreign outflows from treasury bills (T-bills) reached $73 million, while inflows stood at just $44 million — leaving a net withdrawal of nearly two-thirds more than fresh investments.
Rate Cuts Blunt Investor Appeal
Market watchers say the reversal is largely tied to the central bank’s aggressive easing cycle. The benchmark policy rate has been halved to 11%, which has made T-bills far less attractive to foreign buyers seeking higher returns.
But interest rates aren’t the only reason. A Karachi-based analyst noted that global currency trends are also at play:
“The weakening of the US dollar against the euro and other majors has added uncertainty. Investors are cautious, and that risk aversion is being reflected in Pakistan’s bond market.”
Country Breakdown: UK Leads the Exit
The latest numbers show that the United Kingdom, historically one of the largest sources of foreign inflows into T-bills, led the retreat. UK investors brought in $13 million but withdrew a hefty $52.5 million — almost four times more.
Other countries showed mixed behavior:
- UAE investors added $10 million but pulled out $5 million.
- US investors trickled in with $0.85 million, though outflows hit $5 million.
- Bahrain recorded $10.5 million in outflows without any offsetting inflows.
Remittances Cushion the Blow
While portfolio investment remains shaky, the government continues to lean heavily on remittances from overseas workers. In FY25, remittances touched a record $38.3 billion, providing crucial support to the external account.
However, the sustainability of that growth is under question. Incentives given to banks to attract remittances cost the government Rs124 billion in FY25 — a sharp jump from Rs73 billion the year before. Critics, including a former SBP governor, argue these subsidies enriched banks at taxpayers’ expense.
The government has since pared back those incentives, despite warnings from banks and exchange companies that it could slow inflows.
Stable for Now, But Risks Ahead
So far, remittances have remained resilient. August inflows were reported at $3.2 billion, broadly in line with last year’s levels. That strength allowed the SBP to purchase $7.8 billion from the interbank market in FY25, bolstering reserves and keeping the rupee stable.
Still, with foreign investors retreating from bonds and remittance incentives trimmed, policymakers face the challenge of securing consistent external financing without destabilizing the fragile balance achieved in recent months.