KARACHI: Foreign investment in domestic bonds has recorded net outflows during the first two months of the current fiscal year, despite moderate inflows in the same period.

The State Bank’s latest data showed that outflows from treasury bills amounted to $73 million against inflows of $44m — 64pc higher than the receipts. Analysts said the trend, if it persists, could disappoint policymakers who closely monitor foreign currency movements, particularly the US dollar.

They noted that a sharp cut in interest rates had eroded foreign appetite for government papers. The policy rate has been slashed by half to 11pc, reducing returns on T-bills.

“This is not the only factor,” said one analyst. “The weakening of the US dollar against major currencies like the euro has created global uncertainty for investors, which may last longer than expected.”

Outflows of $73m from T-bills outstripped inflows of $44m in two months

Investment in T-bills remains concentrated in a few countries, led by the UK. Inflows from the UK were just $13m, while outflows stood at $52.5m — nearly four times higher. By contrast, the UAE recorded inflows of $10m against outflows of $5m, while inflows from the US totalled $0.85m against outflows of $5m. Bahrain posted outflows of $10.5m without any inflows.

Despite repeated efforts, the government has struggled to attract sustained foreign portfolio investment. Instead, it has relied heavily on workers’ remittances, which reached a record $38.3bn in FY25. However, the outlook has been clouded by the government’s decision to cut costly incentives for remittance inflows.

The incentives cost Rs124bn in FY25, up 70pc from Rs73bn in FY24, prompting criticism from economists and a former State Bank governor that banks were being unduly enriched. In response, the government moved to reduce costs, despite warnings from banks and money changers that the step could reverse the strong growth trend.

Some banks reported losses on the remittance business, saying they were paying higher-than-market rates to attract inflows. The cut in incentives, they war­n­ed, could weaken momentum.

Still, remittances in August stood at $3.2bn, broadly in line with last year’s trend. The robust inflows enabled the State Bank to purchase $7.8bn from the inter-bank market during FY25, strengthening reserves and helping keep the exchange rate stable.

Published in Dawn, September 6th, 2025