Foreign funds flee Pakistan as Gulf war pressures bond market
T-bill outflows hit $794m; UAE deposit rollover uncertainty threatens forex stability
ISLAMABAD: Pakistan’s bond market is under mounting stress as foreign investors withdraw nearly 90 per cent of their holdings amid escalating Gulf conflict, raising fears over the country’s foreign exchange reserves and economic stability.
Data from the State Bank of Pakistan shows that during the first nine months of FY26, foreign inflows into domestic bonds totaled $886.7 million, while outflows reached $794 million, leaving a paltry $93 million in net investment. March alone saw $227 million withdrawn from treasury bills in the first 27 days, against inflows of only $19 million, highlighting declining investor confidence.
The bulk of outflows returned to traditional partners: the United Kingdom led with $281 million, followed by the UAE at $209 million, Bahrain $170 million, Singapore $77.6 million, and the US $32 million. Analysts say these withdrawals, while alarming, may have limited impact on government securities. The bigger concern is the potential non-rollover of official deposits from friendly nations, particularly a $2 billion UAE deposit maturing this month.
Local investors, meanwhile, are increasingly attracted to treasury bills as yields climb to 11.5 per cent, above the State Bank’s policy rate of 10.5 per cent. Still, ongoing war uncertainty and regional instability have eroded foreign confidence, leaving the market exposed to external shocks.
The conflict is already affecting trade and production. Exports to Middle Eastern markets have slowed, while importers struggle to access dollars. Rising petroleum costs and production expenses threaten to exacerbate inflation, putting significant pressure on lower-income households and the industrial sector.
Analysts warn that disruptions to bilateral deposits from China, Saudi Arabia, and the UAE could severely weaken Pakistan’s foreign exchange reserves, which have so far supported a stable exchange rate for over a year. The combination of portfolio outflows, higher production costs, and regional uncertainty presents a complex challenge for policymakers seeking to stabilize both the market and the broader economy. APP
