Foreigner investors withdraw money from T-bills amid interest rate cuts

Foreign investment withdrawal picked up pace in Pakistan as investors pulled their funds out of treasury bills (T-bills). As per reports, investors withdrew 87 percent of their funds out of the economy owing to the recent trend of declining interest rates.

Investors do not consider the new profit rates to be attractive since they have dropped by approximately 50 percent over the past seven months. Profit rates on T-bills have declined as interest rates have been locked in freefall since June 2024 – dropping 1,000 basis points.

During the auction of T-bills held prior to the announcement of the interest rates, the return on six month T-bills was slashed down to just 11.4 percent which represents a 39 basis points cut.

Analysts claim that rates could fall by an additional 100 basis points. This might exacerbate the current issue pertaining to investment outflows as investors will consider parking their funds in other countries where profit rates are higher.

Inflows up to January 17 stood at $72 million while outflows for the same period exceeded $120 million. According to reports, this is not the first time where large outflows have been recorded as over four billion dollars left Pakistan within four months during Covid.

While plummeting interest rates spell great news for businesses, outflows of this magnitude usually apply a downward pressure on the value of the rupee. However, outflows were unable to significantly impact the exchange rate as the rupee remains stable.

Experts have claimed that factors other than declining interest rates could be responsible for foreign investors suddenly pulling their funds out of Pakistan. One of these is the looming possibility of further interest rate cuts in the economy.

Analysts are speculating that the State Bank of Pakistan (SBP) may slash interest rates following the next monetary policy meeting as the inflation rate stands at a controlled 4.1 percent. Further cuts will reduce the profit rates on T-bills yet again.

Data from the SBP revealed that during the first half of Fiscal Year (FY) 2024-25, T-bills have attracted a staggering $984 million. Outflows for the corresponding period stood dangerously high at $852 million.

Over a period of approximately seven months, while interest rates were declining, T-bill inflows from the United Kingdom (UK) stood at a respectable $630 million. This makes the British investors responsible for 64 percent of total T-bill inflows during the aforementioned period.

Reports highlighted how UAE, Bahrain and Australia also added to the T-bill inflow amounts over the past seven months. These countries are destinations for Pakistani migrant workers, partially explaining their motivations for investing in the country.