ISLAMABAD: Pakistan witnessed a sharp decline in foreign investment in local government bonds during March as escalating tensions in the Middle East triggered massive outflows from treasury bills and other securities.
State Bank of Pakistan data revealed that in the first nine months of fiscal year 2026 total foreign inflows into government securities reached 886.7 million dollars while outflows stood at 794 million dollars leaving a net investment of just 93 million dollars.
In the first 27 days of March alone foreign investors pulled out 227 million dollars from treasury bills against fresh inflows of only 19 million dollars highlighting a dramatic erosion of confidence in Pakistani debt instruments.
The largest outflows originated from the United Kingdom with 281 million dollars withdrawn followed by the United Arab Emirates at 209 million dollars Bahrain at 170 million dollars Singapore at 77.6 million dollars and the United States at 32 million dollars.
These figures underscore how geopolitical shocks in the Gulf region have directly impacted short-term portfolio flows often termed hot money which had provided temporary relief to Pakistan’s external account in previous months.
Analysts attribute the sell-off to heightened risk aversion among global investors amid ongoing conflicts that have disrupted energy markets and raised oil prices affecting import-dependent economies like Pakistan.
Regional media reports including those from local business publications have consistently linked the outflows to uncertainty in the Strait of Hormuz and related supply chain disruptions with Gulf-based investors halting fresh purchases in Pakistani treasury bills.
By early March inflows from the United Arab Emirates and Bahrain had effectively dropped to zero after earlier substantial commitments of around 267 million dollars and 187.5 million dollars respectively according to central bank records.
In contrast domestic investors increased their participation in treasury bills viewing them as relatively safer amid volatile external conditions.
This shift has helped the government meet borrowing targets in recent auctions where the State Bank raised hundreds of billions of rupees through market treasury bills despite mixed yield movements.
However the net foreign portfolio position remains fragile with overall foreign investment in the first half of fiscal year 2026 showing limited gains when combining direct and portfolio flows.
Experts warn that prolonged regional instability could exert further pressure on Pakistan’s reserves and current account as higher energy costs strain the import bill and potentially affect remittance flows from Gulf countries.
Pakistan which imports the bulk of its oil requirements has already faced upward pressure on fuel prices contributing to broader inflationary concerns.
While foreign direct investment has also shown weakness declining 33 percent to 1.195 billion dollars in the first eight months of fiscal year 2026 portfolio reversals in bonds have amplified the challenge for policymakers.
Finance officials have described some outflows as part of long-term portfolio rebalancing yet the speed and scale in March suggest sentiment-driven decisions tied closely to Middle East developments.
Market observers note that yields on treasury bills have adjusted in recent auctions with the government successfully raising over 750 billion rupees in one session alone indicating resilient local demand.
Still the dependence on short-term foreign inflows for balance of payments support remains a vulnerability that requires diversified funding sources and improved economic fundamentals.
Economists suggest that sustained reforms in taxation energy and governance could help rebuild investor trust beyond temporary geopolitical headwinds.
As the situation evolves monitoring of foreign exchange reserves and weekly investment data will remain critical for assessing the trajectory of Pakistan’s capital markets.
The developments come at a time when the country continues efforts to stabilize its economy under international financial arrangements while navigating external shocks.