The intensifying Gulf conflict is beginning to weigh heavily on Pakistan’s economy, undermining investor confidence and triggering a sharp withdrawal of foreign capital from local financial markets.
According to the latest figures released by the State Bank of Pakistan (SBP), nearly 90 percent of foreign investment previously placed in Pakistan’s domestic bonds has been withdrawn, reflecting growing uncertainty among global investors as the war drags on.
Despite treasury bill yields rising to around 11.5 percent — higher than the SBP’s policy rate of 10.5 percent — the prolonged geopolitical crisis has discouraged foreign participation. Analysts say attractive returns alone are no longer enough to offset rising regional risks.
During the first nine months of fiscal year 2026, total foreign inflows into government securities reached $886.7 million, while outflows surged to approximately $794 million. As a result, only about $93 million remains invested, illustrating the scale of capital flight.
Economists warn that while bond outflows may remain manageable in the short term, a more serious threat could emerge if friendly countries choose not to extend financial deposits supporting Pakistan’s foreign exchange reserves. Reports indicate that the United Arab Emirates is reconsidering the rollover of a $2 billion deposit maturing this month, raising concerns about reserve stability.
China and Saudi Arabia also hold significant financial commitments that support Pakistan’s reserves, but uncertainty persists regarding future extensions amid the ongoing regional conflict.
Pakistan’s exchange rate, which has remained relatively stable for over a year, could come under renewed pressure if reserves decline further. Businesses are already reporting difficulties in securing dollars for imports, while exports to Middle Eastern markets have slowed due to the conflict.
Economic experts caution that rising global oil prices linked to the war could further strain the economy by increasing production costs, accelerating inflation, and placing additional pressure on lower-income households.
SBP data also shows weakening investor sentiment in March, with $227 million withdrawn from treasury bills in the first 27 days of the month compared to inflows of just $19 million.
The largest investment withdrawal — $281 million — was repatriated to the United Kingdom. Additional outflows included $209 million from the UAE, $170 million from Bahrain, $77.6 million from Singapore, and $32 million from the United States.
As the Gulf war continues with no clear resolution in sight, Pakistan now faces mounting economic risks driven by external uncertainty, declining foreign investment, and growing pressure on its foreign exchange position.
