Foreign investors return to Pakistan as sovereign bond inflows surge

LAHORE: Foreign investors are returning to Pakistan in a big way as January saw the country record its largest net foreign inflows into sovereign bonds since June 2024, according to Bloomberg.

Figures from the State Bank of Pakistan show that net foreign inflows reached $176 million in January, marking a dramatic turnaround from withdrawals of $50 million during the same month in 2025. 

Analysts say this is a clear indicator of renewed investor trust in Pakistan’s debt markets.

The bulk of investment has gone into bonds with maturities of one year or less, which made up about 85% of total inflows, highlighting foreign investors’ preference for lower-risk exposure as they gradually increase their positions in the local market.

The inflows coincide with a sustained recovery in the Pakistani rupee, which has rebounded from its July lows and is on track to strengthen for the eighth consecutive month against the US dollar. 

Mohammed Sohail, CEO of Topline Securities Ltd., told Bloomberg that a stable rupee has been pivotal in attracting foreign investors back to local debt markets. 

Khurram Schehzad, adviser to Pakistan’s finance minister, also highlighted currency stability, improving external accounts, and policy continuity as key drivers behind the inflows.

Pakistan’s foreign exchange reserves now cover more than three months of imports, supported in part by a $7 billion IMF program secured in September 2024, further reassuring international investors, contributing to the inflow surge.

Research unit BMI, part of Fitch Solutions, expects policymakers to maintain the rupee near 280 per dollar this year, reflecting a policy framework supportive of sustained foreign investment. 

The renewed interest in sovereign bonds suggests growing confidence in Pakistan’s economic trajectory, especially for investors seeking short-term, lower-risk opportunities.

Economist Dr. Ikram ul Haq, while speaking to Pakistan TV Digital, said Pakistan’s recording of the largest monthly net foreign inflows into sovereign bonds in 19 months is not merely a capital market headline; it is a political-economy signal. 

In isolation, it suggests renewed investor appetite. In context, it raises deeper questions about the nature, durability, and consequences of this confidence.

From a narrow macro-financial perspective, foreign portfolio inflows into sovereign bonds mean that non-resident investors are purchasing government debt instruments. 

This generates immediate foreign exchange inflow, supports the rupee, strengthens SBP’s reserves position, and reduces short-term financing stress. 

In a country chronically grappling with current account fragility and rollover risks, such inflows temporarily ease external pressure.

Dr. Ikram ul Haq, however, said the issue is not whether money has come; the question is why it has come, at what cost, and with what structural consequence.

First, this development is a vote of conditional confidence, likely driven by the IMF program’s continuity, fiscal tightening measures, elevated real interest rates, and relative currency stability. 

Foreign investors are yield-seeking 

Pakistan presently offers some of the highest real interest rates in emerging markets. 

In an environment where advanced economies are gradually easing monetary policy, high-yield frontier markets become attractive carry trade destinations. 

But this is confidence in returns, not necessarily confidence in structural reform.

He added that portfolio inflows into sovereign bonds are fundamentally different from foreign direct investment (FDI). 

FDI builds factories, transfers technology, and generates employment. Portfolio inflows chase interest rate differentials. They are reversible at short notice. 

Pakistan’s historical vulnerability lies precisely in this composition problem: hot money instead of productive capital. 

If macro conditions shift — political instability, exchange rate volatility, or IMF slippage — these flows can reverse with equal speed, exerting pressure on the exchange rate and reserves.

Moreover, the inflows highlight the layered fiscal implications. 

The government finances its deficit through domestic borrowing at high interest rates. 

When foreigners buy these bonds, the government gains financing flexibility. 

Yet the interest burden remains elevated. 

Pakistan already spends an overwhelming portion of federal revenue on debt servicing. 

If sovereign bond inflows are primarily attracted by high yields, then the state is effectively locking itself into expensive debt. 

Short-term inflows can therefore exacerbate long-term fiscal rigidity.

The broader economic landscape must also be examined. Pakistan’s economy has been stabilized — but not yet transformed. 

Inflation has moderated from peaks, the current account deficit has narrowed, and reserves have improved modestly. 

Yet growth remains subdued, industrial activity is fragile, and the cost of doing business, particularly energy and taxation, remains structurally high. 

In such a setting, bond inflows reflect macro stabilization success, not economic revival.

He noted that the signal to global markets is nevertheless important. 

It indicates that Pakistan is regaining access, albeit cautiously, to international risk capital. 

This reduces default perception and sovereign risk premium. 

If sustained, it may gradually compress yields and lower borrowing costs. 

But sustainability depends on structural reform credibility, not merely short-term macro numbers.

As Bloomberg’s reporting underscores, January’s inflows mark not only a rebound in financial markets but also a potential turning point in Pakistan’s broader economic recovery story.