Pakistan’s new fiscal year has started on a sour note as foreign investors continue to exit treasury bills (T-bills), undercutting one of the country’s most visible sources of short-term portfolio inflows. July, the first month of FY26, saw heavy sell-offs that outweighed the modest inflows recorded, exposing how fragile investor sentiment remains despite official claims of economic stability.
UK Investors In, But Also Out
Fresh data from the State Bank of Pakistan shows that nearly all July inflows came from the United Kingdom. But the same source was also behind much of the outflow, signaling a lack of conviction in Pakistan’s debt market. The United Arab Emirates, which has historically participated in these instruments, brought in no new money and instead withdrew additional funds.
Analysts say this trend points to persistently low confidence. “With the policy rate slashed to 11 percent from 22 percent a year ago, T-bill returns are simply too weak to attract foreign capital,” a senior banker told Dawn. He added that investors expect more rate cuts ahead, further eroding the already slim margins.
T-Bills Lose Their Shine
T-bills had long been a favored entry point for foreign funds looking for short-term, high-yield opportunities. That attraction has waned. The most recent auction on August 8 saw yields of just 10.85 percent, 10.87 percent, and 11 percent on three-, six-, and 12-month papers—well below the double-digit highs available last fiscal year.
Bankers argue that the declining yields are the primary reason for the July exodus. “Pakistan will struggle to bring in fresh portfolio inflows when investors can get better returns elsewhere,” one remarked.
A Wider Struggle to Attract Capital
The weak start to FY26 follows a disappointing FY25, when foreign direct investment (FDI) totaled just $2.4 billion—a mere 4.7 percent increase from the previous year and concentrated in a handful of sectors. Portfolio inflows remained negligible throughout the year, failing to meet government expectations.
Officials continue to promote upcoming privatisation drives and mineral sector opportunities, but market watchers remain unconvinced about how soon these will materialize into actual capital inflows. “Announcements are one thing, execution is another,” said one researcher.
Reliance Shifts Back to Remittances
With portfolio flows in the red and FDI momentum weak, experts say the government may once again have to rely on remittances and external borrowings to manage external financing needs. The State Bank has set an ambitious $40 billion remittance target for FY26. But industry insiders are doubtful, noting that the government has cut back on incentives for banks and exchange companies—measures that previously helped boost inflows through formal channels.
Economists warn that unless Pakistan creates a more competitive investment environment, portfolio investors will continue to look elsewhere, leaving the country dependent on the same lifelines it has leaned on for years: remittances and borrowing.
