Increase in govt bonds outflow

EDITORIAL: Net outflow experienced by Pakistan has been estimated at USD 184. 3 million by 12 March – 13 days after the United States/Israel launched an attack on Iran on 28 February. The United Kingdom led the outflow with USD 69. 5 million followed by Bahrain with USD 33. 7 million, the United States with USD 27. 3 million, Singapore USD 27. 5 million, the UAE USD 15. 4 million and Australia with USD 9 million. Pakistan has not been providing an attractive destination for portfolio investment for some time, a claim backed by the February 2026 Economic Update and Outlook which stipulated that the net outflow of portfolio investment in US dollars was estimated at negative USD 463. 9 million July-January 2026 against negative USD 177 million in the comparable period of the year before. A high policy rate is generally considered a magnet for foreign portfolio investors and a perception that returns maybe compromised through an enhanced risk assessment, be it on the basis of the country’s economic fragility or external factors like the ongoing conflict, portfolio investment can and does leave at the press of a button, a state of affairs that was noted with great consternation during the Asian financial crisis of 1997. In Pakistan, the policy rate was raised to a high of 13. 25 percent in May 2019 as a condition of the programme agreement with the International Monetary Fund (IMF) – from 10. 75 percent in April that year – a jump that was designed to attract foreign portfolio investment to meet the country’s foreign exchange needs but which failed due to the onset of Covid-19 in February of 2020. However, by July-February 2022 portfolio investment peaked at USD 904. 9 million and has declined since: July-May 2022-23 to negative USD 1, 025. 6 million and in the same period 2023-24 to negative USD 558. 1 million. The question is why Pakistan has not been an attractive portfolio investment prospect even though our current policy rate of 10. 5 percent is one of the highest in the region. And why have investors from those countries not engaged in the Middle East conflict decided to withdraw from our market now? Pakistan’s rating by the three international rating agencies has never been investment grade and has remained highly speculative which coupled with the fragility of the economy indicated by the heavy sustained reliance on borrowing externally as well as domestically to meet the budgeted allocation for non-development current expenditure goes some way in explaining why the risk perception with respect to Pakistan remains high. Significantly, the second review IMF document dated December 2025 urged, “consistency in implementing the recently published 2026-28 Debt Management Strategy is critical for further extending maturities and reducing high exposure to short-term interest rates in the medium term. With investor base diversification a key priority, the authorities will conduct a comprehensive study of the bottlenecks for local currency bond market development and publish an action plan to address identified areas of improvement (new end-September 2026 Structural Benchmark). ” In addition, external risks associated with fuel supply disruptions have markedly elevated as a consequence of the conflict and appropriately cautioned by the IMF in the second review documents: “escalation of geopolitical tensions, tightening of global financial conditions, new trade measures in key partner countries, or weakening remittance or international aid inflows; ” domestic risks also remain and are associated with “pressures to ease policies and delay reforms persist, which would risk undermining the progress achieved under the programme” – pressures that are sourced to the 42. 4 percent poverty rate in the country. Copyright Business Recorder, 2026

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