Foreign Inflows Surge as Confidence Grows in Pakistan's Economy

KARACHI: The economic landscape of Pakistan is witnessing a notable shift, as improvements on the external front have led to a significant increase in foreign inflows. In just four days of October, the country attracted $125 million, bringing the total inflows since July FY25 to over $570 million. This surge in investment is a clear indication of growing confidence in the economy, as highlighted by the latest data from the State Bank.

In June, foreign inflows had reached $194 million, contributing to a full-year investment total of $581 million. Financial experts attribute this positive trend to the government's successful negotiation of a $7 billion loan from the International Monetary Fund (IMF). This financial support has not only stabilized the exchange rate but has also bolstered foreign exchange reserves, creating a more favorable environment for investors.

Many analysts believe that the upcoming Shanghai Cooperation Organisation summit could provide Pakistan with much-needed relief on debt servicing and further attract foreign investment. The government is eager to revitalize projects under the China-Pakistan Economic Corridor (CPEC) and is actively working to eliminate obstacles that investors face.

However, some experts caution that transforming Pakistan into a more investor-friendly nation will take time. They argue that uncertainty deters investment, with one researcher stating, "Islamabad has been sealed; armed forces have taken control of the capital. This is enough for investors to realize the situation is not normal for any new venture." Such sentiments reflect the challenges that the country must overcome to create a stable investment climate.

Investment in treasury bills (T-bills) is currently seen as a short-term, risk-free option, as the government provides a sovereign guarantee to investors. This means that investors can withdraw their entire investments at any moment, a lesson learned from the shocks experienced during the Covid-19 pandemic.

A report from Topline Securities indicates that foreign investors have made a strong comeback in the domestic debt market since January, driven by the stabilization of the rupee-dollar exchange rate and the attractive returns on T-bills, which offer yields significantly higher than the 6-7 percent available on debt securities in developed countries.

In terms of geographical distribution, foreign investments have been concentrated in just three countries. The largest investment of $100 million in the first four days of October came from Britain, followed by $20 million from the UAE and $5 million from Singapore. Since July 1, Pakistan has received a total of $571 million, while outflows during the same period amounted to $278.6 million.

In a related development, the Federal Open Market Committee in the USA recently decided to lower its key overnight borrowing rate by half a percentage point, marking the first interest rate cut since the early days of the Covid pandemic. This decision reflects growing confidence that inflation is moving steadily towards the two percent mark. A senior banker noted, "This shows that the T-bills, which still offer yields of up to 17 percent to foreign investors, will continue to attract investment in the coming days." As interest rates decline, T-bills are likely to draw in more dollars, further enhancing the investment landscape.

While the recent inflows into Pakistan's economy signal a positive trend, the path to sustained foreign investment will require ongoing efforts to address uncertainties and create a more stable environment. As the government works to enhance investor confidence, the focus must remain on fostering a climate that encourages long-term commitments from foreign investors. Only then can Pakistan fully realize its economic potential and secure a brighter financial future.