Foreign investment in Pakistan T-bills rises to near-record level

Pakistan’s government securities were an attractive option for foreign investors in fiscal year 2024, attracting near-record levels of inflows in the first eleven months because of the high interest rate.

Data shared by the State Bank of Pakistan (SBP) showed that foreign inflows in T-bills in FY24’s 11 months amounted to $642 million, while outflows were around $112 million. The net foreign investment in T-bills came in at $529 million, of which $204 million alone was in June.

This is the second-highest level compared to $612 million invested by foreigners in FY20. Moreover, January 2020 saw the highest-ever foreign inflows in T-bills at $1.4 billion. However, since part of this amount was later taken out, the net investment at the end of FY24 was $612 million.

Analysts have attributed the rise in foreign investment to Pakistan’s interest rate, which is the highest in the region compared to India’s 6.5%, Bangladesh’s 8.5%, and Sri Lanka’s 8.5%.

Meanwhile, the interest rates in the United States and United Kingdom are 5.25-5.5% and 5.25%, respectively.

This means that if a foreigner invested $100 million in Pakistan government T-bills, they would make $20.5 million on a 12-month basis (on average) compared to $6.5 million for India, and $8.5 million each for Bangladesh and Sri Lanka. (the calculations are based on the interest rates of the countries, not the cut-off yields.)

T-bills are short-term securities issued by the government to raise cash, and have tenures of 3 months, 6 months, and 12 months. They are considered to be low-risk investments since they are backed by the sovereign and have a fixed rate of return called the yield.

The yield depends on the country’s interest rate, market sentiment, and future expectations. After the bidding time for investors has ended, a certain cut-off yield is announced. All bids that are below the cut-off yield are then accepted. When the T-bill’s tenure has matured, the investor is returned the original amount plus the interest (yield).

At the beginning of FY24, the yield was around 22.95% on 3-month bills, 22.99% on 6-month bills, and 23.02% on 12-month bills. The interest rate was a record 22% as the SBP tried to control inflation, which had reached a high of 38% in May 2023.

The interest rate was maintained throughout FY24 till the SBP decided to cut it to 20.5% in June following a decline in inflation, which clocked in at 12.6% in May.

The SBP initially did not revise the cut-off yields following June’s rate cut. However, it later reduced the cut-off yield by 0.01% for six-month T-bills and 0.41% for 12-month bills.