Pakistan Economy: $184M Outflow Amidst Gulf Conflict & Investor Flight

Karachi – Pakistan’s bond markets experienced a sharp downturn on March 13, 2026, with $20 million in outflows as regional tensions escalated following the outbreak of hostilities in the Gulf, according to data released by the State Bank of Pakistan. The outflows during the first 13 days of the conflict – totaling $184.3 million – mirrored those seen in early 2020 at the onset of the COVID-19 pandemic, signaling growing investor nervousness.

Whereas Pakistan is not directly involved in the conflict, the economic repercussions are already being felt. The State Bank data, covering only the initial 13 days of March, reveals a significant net outflow of capital. This figure approaches the $3.5 to $4 billion lost in the months following the pandemic’s outbreak in 2020.

So far, Pakistan has avoided immediate shocks to oil prices and exchange rate stability, despite a notable devaluation of the Indian rupee – falling to Rs94 against the US dollar from Rs88 prior to the Gulf conflict. However, economists warn that a prolonged escalation could severely damage the Pakistani economy.

The largest outflows during the period were recorded from the United Kingdom, with investors withdrawing $69.5 million. The United States followed with $27.3 million, while Singapore accounted for $27.5 million in outflows. Significant withdrawals were also recorded from the United Arab Emirates ($15.4 million) and Australia ($9 million). Bahrain witnessed outflows of $33.7 million, making it the second-largest source of capital flight.

Inflows were minimal, totaling just $19.3 million, with the UK and Bahrain contributing $9.2 million and $10 million respectively. This imbalance underscores the prevailing risk-off sentiment among foreign investors.

Anecdotal reports suggest a shift in migration patterns, with some wealthier Pakistani citizens reportedly leaving the UAE. Simultaneously, a counter-trend is emerging, with Pakistanis from Karachi seeking employment opportunities in Dubai, anticipating vacancies created by departing expatriates. Despite the regional instability, remittances to Pakistan have remained steady, indicating that the majority of Pakistani workers in the Middle East have not yet reacted to the escalating crisis.

Pakistan’s emergence as a potential mediator in the US-Iran conflict, as reported by Gulf News, could offer a pathway to de-escalation. Prime Minister Shehbaz Sharif has held talks with Iranian President Masoud Pezeshkian, emphasizing the necessitate for dialogue. This diplomatic effort, alongside similar initiatives from Turkiye and Egypt, led to a temporary, five-day pause in planned US strikes on Iranian energy infrastructure, according to the same report.

However, the chasm between the US and Iran remains significant and the success of these mediation efforts is far from guaranteed, as cautioned by Al Jazeera. Iran has denied engaging in direct talks with the US, despite claims from US President Donald Trump. Pakistan has offered to host direct negotiations between the two countries, but no firm date has been set.

The situation remains fluid, and the long-term economic impact on Pakistan will depend on the duration and intensity of the conflict. The Ministry of Foreign Affairs has stated its willingness to facilitate talks, but the outcome remains uncertain.