Pakistan saw a reversal in the trend of foreign investment in its short-term local government bonds in December, recording net inflows of $20 million, up from $42.2 million in outflows the previous month. According to State Bank of Pakistan (SBP) data, foreign investors poured in $77.29 million into treasury bills, although $57.27 million was divested during the same period.
The SBP unexpectedly cut its benchmark interest rate by 50 basis points to 10.5% in December, after maintaining it at 11% for four consecutive meetings. The Monetary Policy Committee (MPC) had last lowered the rates in May 2025, and with the latest reduction, SBP has cut rates by a total of 1,150 basis points from 22% in June 2024.
According to a report by Ismail Iqbal Securities, Pakistan’s sovereign narrative has evolved over the last two years, transitioning from fears of default to gradually restoring market confidence. This shift is backed by rating upgrades from Moody’s and Fitch, which cite stronger policy discipline, improved external buffers, better liquidity management, and progress in Pakistan’s IMF program.Â
The report also highlighted a sharp rally in Pakistan’s Eurobonds, signaling a reassessment of sovereign risk, supported by higher reserves, a narrowing current account deficit, and the repayment of select short-term liabilities.
Analysts noted the significant fluctuations in foreign investment in T-bills throughout 2025. The first half of the year saw outflows due to geopolitical uncertainties and more attractive yields in other countries. The decline in interest rates in Pakistan also reduced foreign demand for local bills and bonds.Â
However, in the second half, investments began to stabilize, and the December rebound highlights a renewed interest as Pakistan’s risk premium decreases and policy continuity improves.
Looking ahead, Pakistan plans to re-enter capital markets, with potential issues like a Panda bond in 2026, followed by Eurobond and Global Sukuk issuances by FY27. This move reflects renewed policy credibility and an improved funding flexibility, signaling a shift away from crisis-driven pricing toward a more stable, investable sovereign outlook.
