The ongoing conflict in the Gulf has triggered a swift withdrawal of foreign investment from Pakistan, with Bahrain pulling $30 million from domestic bonds in just the first 10 days of the fiscal year. This exodus underscores a broader crisis: the renewed US-Israeli war on Iran is destabilizing Pakistan's fragile economy, cutting off a vital source of capital and threatening export stability. Main Developments According to the State Bank, no foreign investment entered Pakistan's domestic market from Gulf states during the first 10 days of FY27. The only inflow was a $4 million Luxembourg investment in treasury bills, which offer yields of up to 11.5 percent—among the highest in the developing world. Bahrain, a key US military ally and a target of Iranian retaliation, withdrew $21 million from T-bills and $9 million from Pakistan Investment Bonds (PIBs). The UAE simultaneously pulled $3.5 billion from its account at the State Bank, though Saudi Arabia stepped in to replace that amount, preventing a current account imbalance. Read also: Why Pakistan's food import bill surged 11.66% to $9.15bn Background The war, which began on February 28, has severed a critical source of foreign inflows for Pakistan. In FY26, domestic bonds already recorded a net outflow of over half a billion dollars. The conflict has now closed off options for receiving investments from Middle Eastern countries, which had previously provided crucial financial support. Remittances from Gulf workers—the backbone of Pakistan's economy—remain unaffected so far, but currency experts warn that a prolonged conflict could eventually disrupt them. An exporter quoted in the report noted that uncertainty has been growing daily since the war started, with both internal and external conditions unfavorable for investment. Why It Matters The outflow threatens Pakistan's already sluggish economic growth, which the exporter expects to remain below 4 percent. Stagnant exports and security issues in two provinces compound the problem, meaning no new jobs for a growing workforce. The loss of Gulf investment also weakens Pakistan's ability to stabilize its currency and meet foreign payment obligations. What's Next With the conflict showing no signs of de-escalation, Pakistan faces a prolonged period of reduced foreign investment. The exporter warned that the country should prepare for anything that may harm the economy, as both internal security and external market conditions remain unsuitable for recovery. The government may need to seek alternative funding sources or deepen its reliance on Saudi support.