The escalating intensity of the Gulf War has begun to exert significant pressure on the Pakistani economy, dimming prospects for a near-term recovery as regional instability deepens. Latest data released by the State Bank of Pakistan reveals a startling 90 percent withdrawal of foreign investment from domestic bonds, a move that underscores the fragility of investor confidence in the face of prolonged conflict. While local interest in treasury bills remains high due to attractive returns of 11.5 percent—surpassing the central bank policy rate of 10.5 percent—foreign participants are rapidly exiting the market. After more than 35 days of active warfare, the initial appeal of high-yield government paper has been overshadowed by the perceived risks associated with the geopolitical climate.
Statistical analysis of the financial flows indicates that total inflows for the first nine months of the current fiscal year reached 886.7 million rupees, but these were largely offset by outflows totaling 794 million dollars. This massive exodus has left a mere 93 million dollars in remaining foreign investment within the domestic debt sector. Financial experts suggest that while the departure of portfolio investment from bonds is manageable, a far more critical threat looms regarding the potential withdrawal of deposits held by friendly nations. Reports suggest that the government of the United Arab Emirates is currently hesitant to rollover a 2 billion dollar deposit maturing this month, a development that could severely deplete the foreign exchange reserves of the State Bank and destabilize the exchange rate.
The stability of the national currency, which has been successfully maintained for over a year, now faces its most significant test. Beyond the UAE, other major contributors to the central bank reserves include China and Saudi Arabia, though the status of their respective loans remains uncertain amidst the shifting regional dynamics. The decline in foreign exchange reserves is already having a visible impact on the commercial sector, with importers reporting increasing difficulties in securing dollars for international trade. Simultaneously, exports to Middle Eastern markets have seen a sharp downturn, further constricting the inflow of foreign currency and creating a challenging environment for businesses that rely on regional trade routes.
The economic challenges stemming from the war extend beyond the financial markets to the everyday lives of the public. Analysts warn of a spiral effect where rising global prices for petroleum products lead to higher domestic costs for essential goods, disproportionately affecting the low-income population. Furthermore, the industrial sector is under threat as the cost of production rises, fueled by expensive energy and logistics. Central bank figures for March alone show that 227 million dollars were pulled out of treasury bills in just 27 days, compared to a nominal inflow of only 19 million dollars. This trend highlights a severe lack of trust from global investors who are prioritizing capital preservation over high-interest yields.
A breakdown of the outflows by country shows that the United Kingdom accounted for the highest withdrawal at 281 million dollars, followed by the United Arab Emirates at 209 million dollars. Significant capital exits were also recorded from investors in Bahrain, Singapore, and the United States, totaling hundreds of millions of dollars. As the conflict continues to evolve, the primary focus for national economic managers is to secure the necessary rollovers from friendly states to prevent a total collapse of the reserve buffer. Without these critical deposits, the country faces a difficult path toward maintaining its current account stability and protecting the domestic economy from the widening shocks of the regional war.
Follow thePakBanker Whatsapp Channel for updates across Pakistan’s banking ecosystem