Foreign investors pull $78mn from T-Bill amid falling returns

Foreign investment inflows into Pakistan’s domestic bonds have taken a sharp turn, with disinvestment of $78 million recorded in the first half of August, signaling a reversal from the record inflows seen in July.

According to data released by the State Bank of Pakistan (SBP), foreign inflows into T-bills during the first 15 days of August stood at $8.2 million, while outflows surged to $86.3 million, resulting in a net outflow of $78.15 million. 

The overall inflows for July and mid-August were $271.5 million, while outflows reached $180 million, leaving a net investment of $91.5 million.

This sudden outflow is attributed to a drop in returns on treasury bills (T-bills), which investors expect may decline further in the coming months. In July, T-bill inflows had reached a record $258.3 million, buoyed by a stable exchange rate and attractive returns.

The reversal in investment trends is primarily linked to the SBP’s decision to cut interest rates by 100 basis points to 19.5% on July 29, which has reduced the returns on T-bills. The returns have already dropped to 17.4% and 16.99% for 12-month T-bills, making them less attractive to foreign investors. 

Financial experts anticipate further declines in T-bill inflows as the government struggles to secure a $7 billion loan from the International Monetary Fund (IMF), which has reportedly asked Pakistan to arrange a $12 billion rollover from China, Saudi Arabia, and the UAE.

While the returns on T-bills remain high compared to other developing economies, offering foreign investors lucrative gains, experts warn that further interest rate cuts—expected in the next monetary policy announcement—could deter foreign interest. 

The stable exchange rate and the SBP’s foreign exchange reserves of $9.4 billion had initially supported the inflows, but declining inflation and the prospect of further rate cuts may reduce the appeal of Pakistani bonds.

In the previous fiscal year, Pakistan received total inflows of $580.8 million into T-bills. However, the recent outflows signal potential challenges ahead, especially as the country faces external debt servicing difficulties and struggles to raise funds from international markets despite recent improvements in credit ratings by Fitch and S&P.