KARACHI: Foreign investment in Pakistan’s short-term local government bonds declined in late February following a surge in inflows in the previous month, as rising oil prices amid geopolitical tensions increased currency risk.
As of February 20, Treasury bill (T-bill) saw the net foreign inflows of $18.1 million, a significant decrease from $148.4 million in January, which was the highest single-month inflow so far this year, according to data from the State Bank of Pakistan.
Overseas investors poured $63.151 million into T- bills by February 20 but withdrew $45.064 million.
“Foreign investors turn cautious as the increase in oil prices due to geopolitical tensions has increased the currency risk,” said Awais Ashraf, director of research at AKD Securities Limited.
Saad Hanif, head of research at Ismail Iqbal Securities, noted that while Pakistan’s T-bill market continues to attract steady foreign interest, data for the first 20 days of February indicate a slight moderation in activity.
“This momentum, however, masks a turbulent journey, most notably the sharp outflows of $197.4 million and $187.9 million in March and April 2025, respectively, which are best understood as a classic carry trade unwinding,” Hanif said.
“When Pakistan’s policy rate was at its peak of 22 per cent, foreign investors poured money into T-bills because real returns were exceptionally attractive,” he added. “However, as the [SBP] began its aggressive easing cycle, the interest rate differential narrowed rapidly, eroding the core investment thesis.”
According to Hanif, the relatively modest inflow of $46.9 million in February 2025 was already an early warning signal — investors were becoming hesitant to deploy fresh capital as rate cut expectations firmed up, foreshadowing the full-blown exit that materialised in subsequent months.
“The revival from October 2025 onwards, culminating in the January 2026 peak, suggests that once the rate cycle stabilised and the rupee held relatively steady, foreign investors found the risk-reward attractive once again,” he said. “Pakistan’s IMF programme played a crucial role here, providing macro credibility and reducing the currency depreciation risk that typically spooks portfolio investors in frontier markets, ultimately restoring confidence and bringing foreign capital back into the T-bill market.”
