Gulf conflict triggers sharp pullback from Pakistan’s T-bills

KARACHI: The ongoing Gulf conflict has started weighing on Pakistan’s economy, with prospects for a quick recovery fading as the war intensifies, according to State Bank of Pakistan data and market analysts cited in the report.

The latest central bank figures showed a steep retreat in foreign investment in Pakistan’s domestic bonds. During the first nine months of FY26, total inflows stood at Rs886.7 million, while outflows reached $794 million, leaving only about $93 million invested. This meant nearly 90 per cent of foreign investment in domestic bonds had been withdrawn.

At the same time, local investment in treasury bills has been rising as returns climbed to 11.5 per cent, compared with the SBP policy rate of 10.5pc. While that spread has made T-bills appealing for overseas investors, the conflict, now continuing for more than 35 days, has weakened investor confidence.

March outflows highlight weak sentiment

SBP data showed that in the first 27 days of March alone, $227 million was pulled out of T-bills, against an inflow of $19 million. The figures were presented as a sign of fragile foreign investor sentiment.

The largest withdrawal came from investment returning to the United Kingdom, amounting to $281 million. Other outflows were reported at $209 million for the United Arab Emirates, $170 million for Bahrain, $77.6 million for Singapore, and $32 million for the United States.

Analysts said the outflow from domestic bonds may have a limited effect on its own. However, they warned that any withdrawal of deposits held with the State Bank by friendly countries could create a much more serious challenge for Pakistan’s foreign exchange reserves.

Reserve concerns and trade pressures

There were indications that the UAE government was reluctant to roll over $2 billion maturing this month. China and Saudi Arabia also contribute to the SBP’s foreign exchange reserves, though it remained unclear what would happen to loans other than those from the UAE.

Low SBP reserves could put severe pressure on the exchange rate, which has remained stable for more than a year. It also said exports to the Middle East have fallen, while importers are reporting difficulties in securing dollars.

“The war has created many economic challenges for Pakistan. It’s not only the foreign exchange but the spiral effect of higher prices of petroleum products could hit the poor masses on a large scale,” said an expert, adding that the industry has also come under serious threat from the high cost of production.

The conflict’s economic impact is extending beyond financial markets, with concerns also emerging over trade flows, access to foreign currency, and rising production costs for industry.