T-Bills
KARACHI: Pakistan has witnessed a significant withdrawal of foreign investment from its treasury bills (T-bills), with 87% of funds exiting the market due to a sharp decline in profit rates over the past seven months.
This massive outflow comes despite the stability of the exchange rate for over a year, highlighting deeper concerns among foreign investors regarding Pakistan’s economic landscape.
According to data from the State Bank of Pakistan (SBP), the country attracted a total inflow of $984 million into T-bills from July 2024 to January 17, 2025.
However, during the same period, an outflow of $852 million was recorded, indicating a substantial decline in foreign interest in Pakistan’s short-term debt securities.
Sharp Decline in Returns Triggers Sell-Off
A primary factor behind this withdrawal is the significant reduction in returns on T-bills, which have fallen by more than 50% from their peak of 24%.
This decline is closely linked to the SBP’s monetary policy, which has seen the policy rate slashed by 1,000 basis points, bringing it down to 12% in an effort to stimulate economic activity.
The latest T-bill auction, held just before the monetary policy announcement on January 27, saw further reductions in yields. The return on the 12-month T-bill was cut by 41 basis points to 11.38%, following a prior reduction of 49 basis points in the January 8 auction. Similarly, the benchmark six-month T-bill yield dropped by 39 basis points to 11.4%.
Market Uncertainty and Investor Sentiment
Financial experts suggest that foreign investors are particularly sensitive to economic risks and tend to withdraw their capital at the earliest signs of instability. A similar trend was observed during the COVID-19 pandemic when over $4 billion left Pakistan’s debt market within a few months.
While Pakistani authorities maintain that the country’s external debt servicing of $26.1 billion for FY25 is largely under control, investor confidence remains shaky. The ongoing uncertainty surrounding Pakistan’s debt obligations and the possibility of further interest rate cuts have made T-bills a less attractive investment option for foreign investors.
Breakdown of Foreign Investment Flows
The breakdown of foreign investment movements in T-bills over the past six and a half months provides further insights into the changing investment landscape. Of the $984 million in total inflows, the UK accounted for the largest share at $630 million, making up 64% of the total. However, UK investors also led the withdrawals, pulling out $457 million.
Other key sources of T-bill investments included the UAE ($152 million), Bahrain ($61 million), and Australia ($52 million). However, with the latest monetary policy signaling further potential rate cuts, it is expected that more investors may continue to exit Pakistan’s T-bill market in search of better returns elsewhere.
This sharp decline in foreign investment underscores the challenges Pakistan faces in maintaining investor confidence while balancing economic growth and monetary policy adjustments. As interest rates continue to decline, the government may need to explore alternative measures to retain foreign investment in the country’s financial markets.
