Three news items this week past should be a source of serious concern to the country’s stakeholders: SBP’s decision to purchase USD 8 billion from the open market to shore up reserves, the delay in utilising the secured 1.275 trillion rupee loans from commercial banks to retire the energy sector circular debt and the rising sugar prices.
A report released by Arif Habib Limited on 29 July 2025 revealed that the State Bank of Pakistan (SBP) had intervened in the open market to procure USD 7.2 billion – USD 885 million to strengthen foreign exchange reserves with the remaining amount used to service debt and/or to retire the principal as and when due.
The rupee’s external exchange rate is determined within the parameters of three major objectives. First, the difference between the interbank and the open market rate must not go beyond plus/minus 1.25 for five consecutive days as per the International Monetary Fund (IMF) condition — no doubt put in place after the flawed policy effective from October 2022 to nearly June 2023 to artificially control the interbank rate that led to multiple exchange rates resulting in the loss of USD 4 billion in remittance inflows through official channels. The country’s reserves as a consequence of this flawed policy plummeted to under USD 3 billion.
Second, any loss of the rupee value against the dollar raises the country’s mark-up payments that constitute 50 percent of total current expenditure and 46 percent of total expenditure in the 2025-26 budget that, in turn, would raise the budget deficit with severe inflationary implications.
It is relevant to note that the dollar performed poorly in the ongoing calendar year due to the prevailing geopolitical crises and threat (and the subsequent levy) of punitive tariffs on several countries including Pakistan (a disturbing 19 percent after a deal was secured) leading to its loss of value against all major currencies though the Pakistani rupee has miraculously remained resilient.
The resilience required import restrictions and strengthening the foreign exchange reserves through open market purchases by the SBP though in spite of the interventions total reserves were USD 14,456.6 million on 18 July 2025 while one year roll-overs by friendly countries were at USD 16 billion — higher than the reserves by USD 1.5 billion.
The SBP began intervening in the open market and picked up around USD 8 billion 2024-25 which as per Malik Bostan, chair of the Exchange Companies Association of Pakistan, led to a dip in the supply of US dollars to legal channels given that better rates were available in the black market.
The issue was resolved after Bostan led a delegation to meet the Director General of ISI that culminated in a well-targeted crackdown on currency smugglers, especially those operating routes in Afghanistan and Iran. This was confirmed by Bloomberg’s report that while SBP has indicated it will continue to build its dollar stockpile, yet it would be at a slower pace so as to minimize undue pressure on the rupee.
Of course, the question that begs an answer is why did not the SBP take this slower approach in the first instance and why did it allow matters to reach a stage that compelled the establishment to step in. Be that as it may, the rupee stabilized this week past.
Third, the foreign exchange reserve position even though it strengthened subsequent to the SBP interventions was not adequate to allow for lifting of some administrative import restrictions or to clear dues of approximately 500 billion rupees (USD 1.72 billion at the interbank rate), of Chinese Independent Power Producers (IPPs), established under the umbrella of the China Pakistan Economic Corridor (CPEC) remains in abeyance.
The strategy is explained as follows: total circular debt of 2.381 trillion rupees was to be nearly halved by borrowing 1.275 trillion rupees from 18 commercial banks (approved by the Fund, the first hurdle, as the discount rate had been halved since the proposal was first floated by the negotiator Muhammad Ali). This loan, secured after much wrangling with the banks, was to be repaid over six years via a debt service surcharge (DSS) of 3.23 rupees per unit, which is already included in electricity bills.
IMF in the first review documents of the ongoing programme (uploaded May 2025) stipulated as a structural benchmark that: “the DSS will be set at 10 percent of the Nepra-determined revenue requirement, adjusted each year at the time of annual rebasing, per current practice.
In the event that DSS revenues fall short of the annual payment requirement, the DSS will be increased to make up for the shortfall and calibrated per any anticipated future shortfalls in the succeeding year.“ In short, there is no cap on the DSS and therefore the general public can only hope that the government’s projections are accurate.
The remaining amount of the circular debt was to be generated from lower interest rate gains and revised Power Purchase Agreements (PPAs).
The government succeeded in securing termination of five domestic IPPs (0.77 rupee per unit relief), revised eight bagasse power plants (0.14 rupee per unit relief) and shifted 14 IPPs to take and pay model (0.43 rupees per unit) however the Chinese IPPs have refused to renegotiate the PPAs thus stalling the implementation of this strategy.
Again one may argue as to why these wrinkles had not been ironed out before seeking and securing the loan.
And finally, the sugar price has skyrocketed yet again making this administration as unable to take appropriate decisions at the right time as its predecessors.
The root cause of this recurring problem is as follows: (i) inaccurate information of sugar stocks provided to the Sugar Advisory Board, headed by the Minister for Food Security and Research (at present Rana Tanveer), but which includes representatives from politically extremely influential members of Pakistan Sugar Mills Association (with 80 plus members).
Time and again one reads reports that the SAB decided to allow exports if there is surplus stock (with the proviso that the approval will be withdrawn if the price of sugar rises domestically) and approved an export subsidy if the international price of sugar was lower than the domestic price.
Rana Tanveer recently stated that the answer to this recurring problem is to deregulate the industry and lift a long-standing ban on new sugar licences. Sadly, these decisions are unlikely to resolve the crisis this industry faces for two reasons: first and foremost, the industry does not operate under open market conditions, which requires a large enough number of both buyers and sellers to disable them from influencing price.
The PSMA is a well-organized body that is also registered with the Securities and Exchange Commission of Pakistan. And secondly, lifting the ban on new sugar licences will allow setting up mills in locations which may be detrimental to the farmers’ interests.
To conclude, it is critical for the SBP, the Power Division and the Ministry of Food Security to undertake policies after first thoroughly assessing the ground realities. And prior to implementing a decision, its pros and cons must be understood and mitigating measures put in place before proceeding with a flawed policy decision.
Copyright Business Recorder, 2025
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