Debt, dollars and the missing explanation

EDITORIAL: So it’s official — over USD 7.2 billion quietly pulled from the local FX market by the State Bank over eleven months, mostly to service debt.

Markets had long suspected as much, but now there’s a number to anchor that suspicion. What remains unexplained, though, is the method behind this intervention — especially its monetary consequences. If these dollars were acquired using newly created rupees, as past trends suggest, then the inflationary consequences should’ve been part of the State Bank’s own disclosures. They weren’t.

This kind of dollar accumulation, in theory, is part of any central bank’s effort to manage its balance of payments and debt obligations. But when it involves large-scale absorption of dollars from domestic markets — over USD 1.1 billion in a single month at one point — without parallel transparency about the monetary offset, it borders on fiscal sleight of hand. Because there are only a few ways the SBP can buy dollars in such volume, and most involve injecting rupees into the system. That, by definition, expands domestic money supply unless fully sterilised. And nothing in the State Bank’s public statements suggests such sterilisation has taken place.

It’s also worth noting how little of this intervention actually translated into reserve accumulation — less than a billion dollars. The rest was funnelled into external debt payments. That means the true motive wasn’t to build buffers, but to manage liabilities. Fine, but then let’s be clear about it. The SBP played a fiscal role here, not a purely monetary one. Which raises the question: was this done independently, or as an arm of the finance ministry?

The inflation angle is hard to ignore. After months of deceleration, headline inflation has started inching back up. No alarm bells yet, but this is precisely how it started last time. A steady stream of liquidity, hidden under layers of technical justification, feeding into the real economy without the central bank admitting its hand. It took a full-blown cost-of-living crisis for the policy response to catch up. And the scars of that experience — 30 percent-plus inflation sustained over months — are still fresh.

For a central bank that has repeatedly invoked “transparency” and “autonomy,” the silence on this front is troubling. The public deserves to know: was this dollar buying exercise matched by equal mopping up of rupee liquidity? If not, what were the inflation forecasts adjusted for this intervention? Did the monetary policy committee sign off on the strategy, or was this done off the record books, as part of a bigger fiscal balancing act? So far, no answers.

This is not a critique of managing reserves or debt. That’s an operational necessity. It’s about the framework, or lack thereof, that governs how those goals are pursued. Because in a country still living with the consequences of prior monetary misadventures, trust hinges not on outcomes alone, but on the process. And when that process involves quiet interventions in the FX market, it undermines confidence in the very institution tasked with stabilising prices.

If the State Bank’s actions are contributing to inflation again, even indirectly, it must say so. If they aren’t, it must show how it avoided that risk. Without answers, speculation fills the void, and that’s the last thing a fragile macro environment needs.

Copyright Business Recorder, 2025