Pakistan saw significant foreign investment outflows from its treasury bills (T-bills) in fiscal year 2025, with total withdrawals exceeding $1.5 billion, according to the latest data released by the State Bank of Pakistan (SBP). The exodus of funds highlights growing investor caution driven by geopolitical tensions and a sharply reduced interest rate environment that has eroded the appeal of local debt instruments.
The SBP data revealed that outflows from domestic bonds during FY25 were 24 percent higher than the inflows, underlining the pressure on Pakistan’s local debt markets. Although foreign inflows into T-bills totaled $1.279 billion during the year — notably higher than the preceding year — this was insufficient to offset the capital flight that accelerated in the final months of the fiscal period.
June stood out as the most turbulent month, with foreign investors drastically scaling back their exposure. They purchased just $24 million worth of T-bills while simultaneously withdrawing $113 million. Market participants pointed to increased geopolitical risk premiums as a primary reason. The four-day episode of Indian aggression in May, followed by sustained hostile rhetoric from India’s political circles and media outlets, amplified investor concerns over regional stability.
Adding to the strain was the State Bank’s aggressive monetary easing. Over the course of the fiscal year, the SBP cut its benchmark policy rate to 11 percent, a dramatic decline from 22 percent in June 2024. While this move was largely in response to falling inflation trends and aimed at stimulating domestic borrowing and consumption, it also eroded the lucrative returns that had previously drawn foreign investors to Pakistan’s short-term government paper. Many bankers believe that with inflation continuing its downward trajectory, additional rate cuts cannot be ruled out, further dimming the prospect of a swift recovery in T-bill yields.
Country-wise trends provide deeper insight into the shifting sentiment. The United Kingdom registered the largest outflow of funds from Pakistani T-bills, with $924 million withdrawn against inflows of $750 million. The United Arab Emirates followed with outflows totaling $256 million, slightly exceeding its inflows of $277 million. The United States showed an even starker imbalance: just $26 million flowed into T-bills from American investors, while withdrawals reached $186 million, reflecting heightened caution.
Pakistan’s equity market also struggled under similar pressures. During FY25, foreign investors poured $460 million into equities but pulled out a much larger $815 million. Analysts noted that the equity segment, already sensitive to political and regional headlines, became even more vulnerable following the border tensions in May, causing global funds to reassess their exposure.
Despite these outflows, the broader external account continued to benefit from record worker remittances, which surged to $38.3 billion in FY25. However, analysts caution that slow export growth, persistently weak foreign direct investment inflows, and accelerating foreign divestment from local bonds could pose serious challenges for policymakers trying to stabilize the external sector.
Going forward, Pakistan’s monetary authorities face a delicate balancing act: fostering domestic growth through lower interest rates while maintaining an environment attractive enough to retain and grow foreign portfolio investments. With geopolitical tensions adding an extra layer of uncertainty, the outlook for foreign flows into Pakistan’s debt and equity markets remains clouded.