KARACHI: Foreign investment in Pakistan’s short-term local government bonds has dried up this month, signalling a shift in investor behaviour as geopolitical risks escalate due to surging oil prices amid the ongoing Middle East war and the conflict with Afghanistan.
As of March 13, Treasury bills (T-bills) posted net foreign outflows of $165.1 million, compared with $31.2 million inflows in February, according to data from the State Bank of Pakistan published on Thursday.
Overseas investors poured $19.257 million into treasury bills by March 13 but withdrew $184.347 million.According to SBP data, investments from the United Arab Emirates in Pakistan’s T-bills were zero as of March 13. However, amid regional tensions, they divested $15.432 million. Investments from Bahrain totalled $10 million, but withdrawals settled at $33.723 million.
The SCRA T-bills flow pattern highlights the inherently volatile nature of foreign participation in Pakistan’s debt market, where flows are largely driven by global risk sentiment and relative real returns, said Saad Hanif, head of research at Ismail Iqbal Securities Limited.
“After a brief recovery supported by attractive interest rates and improving macro stability, the recent outflow signals a shift in investor behaviour as geopolitical risks intensify,” Hanif said.
Foreign investors have invested $886.7 million in T-bills so far this fiscal year, but they have withdrawn $751 million. Hanif noted that the ongoing Middle East conflict has led to a sharp increase in oil prices, which is particularly concerning for Pakistan, given that oil constitutes around one-third of the import bill. This creates immediate pressure on the trade balance and raises concerns around the sustainability of recent current account improvements. “In this environment, higher oil prices are likely to widen the current account deficit and increase demand for dollars, putting downward pressure on the currency,” he said.
“For foreign investors, the risk of the rupee depreciation erodes the appeal of T-bill investments despite high nominal yields, prompting capital outflows," he said. “If oil prices remain elevated and external inflows do not offset the pressure, Pakistan could face renewed stress on its external account, leading to currency weakness and potential reserve drawdowns in the near term,” he added.
The conflict between Iran and Israel has disrupted global energy supplies and decreased investor demand for emerging markets. Gas prices have surged, and oil prices have spiked again as the two countries intensified attacks on each other’s energy facilities. Brent crude, a key global price indicator, rose by 8.0 per cent, reaching $116 a barrel. Crude prices have increased by approximately 60 per cent since the US and Israel began a military campaign against Iran on February 28.
Meanwhile, Pakistan’s dollar bonds have experienced significant volatility, according to Bloomberg. Eurobonds have resulted in more than 5.0 per cent losses for investors since the onset of the conflict in Afghanistan at the end of February. However, Pakistan and Afghanistan have decided to temporarily halt hostilities during this week’s Muslim festival of Eidul Fitr amid weeks of deadly fighting between the neighbouring nations.
MNCs repatriate $1.73 billion in July-February FY26
The repatriation of profits and dividends from foreign investors in Pakistan increased to $1.726 billion in the eight months of the fiscal year 2026 from $1.561 billion a year earlier, the central bank data showed.
In February, Pakistan recorded a profit and dividend repatriation of $48.7 million.The SBP data showed that the power sector saw the largest increase in repatriated earnings, followed by significant inflows in the financial and communications sectors.
The power sector reported a total outflow of profits and dividends amounting to $421.8 million in July-February FY26, an increase from $244.6 million during the same period last year. The financial sector ranked second, with repatriated earnings totalling $374.1 million, compared with $192.6 million in the same period the year before.
