KARACHI: Foreign investment inflows into domestic bonds have reversed significantly, with a notable disinvestment of $78 million occurring within the first 15 days of August.
The sudden withdrawal of funds may stem from various factors, with declining returns on treasury bills being a primary concern for investors. In July, the first month of the fiscal year, there were record inflows into treasury bills totaling $258.3 million.
Data released by the State Bank on Friday shows a sharp decline in investment inflows for August, suggesting a shift in investment strategy. Financial experts anticipate a further decrease in T-bill inflows due to two main factors: falling returns on T-bills and the government’s ongoing struggle to secure a $7 billion loan from the IMF. The IMF reportedly requires Pakistan to secure a $12 billion rollover from China, Saudi Arabia, and the UAE.
**Declining Returns Drive Investment Reversal**
In the first half of August, foreign investment inflows amounted to $8.194 million, while outflows reached $86.347 million, resulting in a net outflow of $78.15 million. For July and the first half of August combined, total inflows were $271.5 million, and outflows totaled $180 million, leaving a net remaining investment of $91.5 million.
Inflows in T-bills had previously been driven by a stable exchange rate and attractive returns on domestic bonds. However, the State Bank’s decision on July 29 to cut interest rates by 100 basis points to 19.5% has diminished returns on T-bills. Current returns on T-bills have dropped to 17.4% and even lower to 16.99% for 12-month T-bills.
Experts note that, despite these reductions, returns remain relatively high compared to other developing economies. Foreign investors have been leveraging this opportunity by borrowing from foreign banks at lower rates to invest in Pakistan and benefit from higher returns.
The stable exchange rate, supported by the State Bank’s foreign exchange reserves exceeding $9.4 billion, reflects overall economic stability, with strong export and remittance figures. Nonetheless, declining inflation has led the State Bank to consider further interest rate cuts. Financial experts predict a possible 150 basis points reduction in the upcoming monetary policy announcement on September 12, which could further lower T-bill rates and potentially diminish foreign investor interest in domestic bonds.
In the previous fiscal year, Pakistan saw total inflows of $580.8 million into T-bills. The current trend could pose a challenge for the country, already grappling with external debt servicing issues and facing difficulties in launching bonds to raise dollars from international markets, despite recent improvements in credit ratings by Fitch and S&P.
