Gulf Investors Capture 60% Share of Pakistan Government Debt Inflows Amid Regional Unrest

KARACHI: Investors from the Gulf region now account for 60 percent of all foreign inflows into Pakistan’s government debt this fiscal year, up from 56 percent last year. An investment adviser attributed the rise to high yields and regional instability, which have spurred increased purchasing from the Middle East, particularly the United Arab Emirates.

The UAE has driven the latest surge, with gross portfolio inflows into Pakistani securities hitting $115.1 million as of September 26. This is more than 22 times the roughly $5 million recorded on February 26, just two days before the US-Iran war began, according to State Bank of Pakistan (SBP) data.

Purchases have shifted significantly toward Pakistan Investment Bonds (PIBs), longer-term government securities, with UAE investors contributing $110 million in September versus no investment immediately prior to the war. Bahrain invested a further $10 million in PIBs and $14 million in shorter-term Market Treasury Bills (MTBs).

The UAE’s net portfolio position in Pakistan turned into an inflow of $64.7 million as of September 26, reversing from net outflows of $10.7 million on February 26. Bahrain’s position similarly shifted from $4.06 million in net outflows before the conflict to a $3.28 million net inflow in September.

“This investment shift is because of the prevailing war and uncertainty in the Middle East region,” said Samiullah Tariq, group head of research and development at Pakistan-Kuwait Investment Company, which is jointly owned by the governments of Pakistan and Kuwait.

The increase coincides with Pakistani government debt offering substantially higher returns than securities in many Gulf markets. Pakistan’s central bank policy rate is 11.5 percent, with T-bill and PIB yields around 12-12.5 percent, compared to UAE government bond yields of roughly 4.5-5 percent, according to data compiled by Singapore-based investment advisory Merix Global.

“Some of this investment is being channeled to Pakistan to avail the yields available which are higher than a lot of countries,” Tariq told Arab News, adding that Pakistan’s relative risk was lower than that of many countries during the conflict.

OUTSIDE THE LINE OF FIRE

This shift has occurred as the US-Iran war disrupts energy supplies, trade, and financial markets across the Middle East, following US and Israeli strikes on Iran in late February that triggered Iranian retaliation against Washington and its Gulf allies.

Pakistan, which shares a roughly 900-km (560-mile) border with Iran but lies outside the main theater of fighting, has also emerged as a mediator in the conflict, working with other regional states to facilitate negotiations between Washington and Tehran.

Islamabad helped mediate talks that produced an interim agreement in June, though fighting subsequently resumed and diplomatic efforts have yet to secure a lasting settlement.

Muhammad Ahmed, chief executive of Merix Global, said Gulf-based investors had become the biggest foreign participants in Pakistan’s T-bill and PIB markets, accounting for 60 percent of foreign inflows so far in the current fiscal year, which began in July.

That compares with 56 percent in fiscal 2026 and just 4-7 percent in FY20 and FY24, according to Ahmed, showing that Gulf investors had already become a major presence in the market before the latest war-related increase in buying.

“Pakistan is close to the Gulf but outside the line of fire, it is a familiar market with a large diaspora in the UAE, and it offers high yields with a stable currency currently,” Ahmed told Arab News.

He said the pickup in UAE buying also reflected weaker investment opportunities at home, with Dubai equities down 9.2 percent and Abu Dhabi equities 4.2 percent since the onset of the war.

Real estate prices have also declined, he said.

LONGER-TERM BET

For Pakistan, the inflows come as the country seeks to consolidate an economic recovery under a $7 billion International Monetary Fund program following a prolonged balance-of-payments crisis.

The SBP’s foreign exchange reserves have risen to around $21.4 billion, while Pakistan has received sovereign credit rating upgrades this year as its external buffers and macroeconomic indicators have improved.

Foreign purchases of government securities bring in hard currency and broaden the investor base for Pakistan’s large domestic borrowing needs. But portfolio investment can reverse much faster than foreign direct investment, particularly when investors are attracted primarily by high yields.

Ahmed said Gulf investors were not only the largest foreign buyers of Pakistani government debt but also the biggest sellers, accounting for 58-66 percent of foreign outflows.

“In FY26 the Gulf moved $1.4 billion in and out but kept only $53 million net. These amounts are small next to Gulf portfolios worth trillions,” Ahmed said.

“The move into PIBs is the first sign of longer holding; it needs a few more quarters before we can call it a trend.”

The shift toward PIBs is significant because they carry longer maturities than Treasury bills, potentially indicating greater willingness among some Gulf investors to maintain exposure to Pakistani debt for longer periods.

But recent movements also illustrate how quickly such portfolio flows can reverse.

UAE and Bahraini investors initially pulled $97 million and $31 million, respectively, from Pakistan in March after the war began, according to Ahmed, before returning to Pakistani securities in subsequent months.

Ahmed said Pakistan’s stronger foreign exchange reserves, ongoing IMF program and recent sovereign rating upgrades had improved its risk profile, but the rupee remained an important risk for foreign investors.

Currency depreciation can quickly erode the additional returns investors earn from Pakistan’s higher interest rates.

“A 3-4 percent annual depreciation would erode a significant portion of the yield premium over dollar bonds,” Ahmed said.

“The March exits show this is yield-seeking money that can leave just as fast,” he added.

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