What’s missing from the outlook?

EDITORIAL: So the economy is finally turning a corner — at least on paper. The State Bank now projects GDP growth between 3.5 and 4.25 percent in FY26, with signs of life returning to LSM, home remittances expected to cross USD 40 billion, and foreign exchange reserves projected to rise to USD 17.5 billion by June next year. Even the credit agencies, long sceptical of Pakistan’s external position, have responded by upgrading the country’s rating.

But while this improving macro narrative deserves acknowledgment, there’s one issue that continues to simmer beneath the surface — inflation. And this time, it’s not just independent economists or market analysts raising red flags. The central bank itself now concedes that inflation may temporarily breach its 5-7 percent target range, citing core pressures. That admission, notably absent from previous briefings, carries particular weight in light of recent revelations about SBP’s role in the foreign exchange market.

It’s now a matter of public record that the central bank purchased over USD 7.2 billion from the local FX market between June 2024 and April 2025. Of that, less than USD 1 billion was added to reserves, while the bulk went toward external debt servicing. What’s still not clear, however, is the monetary side of that equation — how those dollars were bought. If rupees were injected into the system to finance these purchases, and those rupees haven’t been sterilised, then the operation effectively expanded the money supply.

That would explain why, despite a 1,100 basis-point cut in the policy rate over recent months, core inflation remains sticky. And why even the State Bank, after months of highlighting disinflationary trends, now expects price pressures to persist above its comfort zone. Yet, there was no mention in the MPC briefing of whether the central bank’s FX interventions were offset through open market operations or other liquidity-absorbing measures. That absence matters.

Inflation is as much about expectations as it is about data. When the market sees the central bank buying dollars and building reserves, it needs to also see the measures being taken to prevent those purchases from feeding inflation. In the absence of clear sterilisation, the public is left to assume that reserves are being rebuilt at the cost of monetary expansion — and, ultimately, the purchasing power of the rupee.

The Governor’s emphasis on stronger fundamentals and improved sentiment is not misplaced. Growth in intermediate goods and machinery imports does indicate investment revival. Reserves do now exceed the country’s net annual debt repayment obligations, a reversal from past years. But that progress will only remain credible if the risks accompanying it are acknowledged and addressed transparently.

The 2022-24 inflation shock is not a distant memory. It was barely two years ago that headline inflation surged past 30 percent, wreaking havoc on household budgets and pushing monetary policy into emergency territory. Any policy, no matter how well-intentioned, that risks reopening that wound must be openly debated, not quietly assumed.

There’s a fine line between optimism and overconfidence. The SBP has rightly flagged risks to agriculture, external trade balances, and remittance inflows. But it must also come clean on its own recent actions, particularly those with inflationary consequences. If the FX purchases were sterilised, the public deserves to know how and to what extent. If they weren’t, the monetary policy framework needs to reflect that risk more directly.

It’s possible to welcome signs of recovery while still demanding clarity on the cost. In fact, doing so is essential to ensuring that today’s optimism doesn’t become tomorrow’s policy mistake.

Copyright Business Recorder, 2025