Stabilisation alone not sufficient

EDITORIAL: The SBP (State Bank of Pakistan) governor recently stated that the economy is now on a stable footing, citing the rise in SBP’s foreign exchange reserves from USD 2.8 billion to USD 14.3 billion in a little over two years. His statement is factually correct and reflects general market sentiment.

In another statement, Deputy Governor Inayat Hussain told the Senate Standing Committee last week that had the SBP not purchased dollars from the interbank market the PKR would have appreciated against the USD. His claim about dollar purchases is accurate, as SBP bought 8.2 billion dollars from the market between June 2024 and May 2025. Estimates suggest total purchases of USD 12-14 billion during 2024 and 2025 so far.

However, the assertion that the PKR would have appreciated without these purchases is questionable. Without SBP intervention, panic over low reserves could have triggered massive depreciation.

History shows that whenever SBP reserves fall to critical levels, public confidence in PKR erodes, often resulting in sharp currency declines. A more accurate way to frame this is that PKR stability and broader economic stabilisation are tied to SBP’s active dollar purchases.

The central bank should continue these interventions while also reducing forward liabilities. Even at USD 14.3 billion, once USD 2.4 billion in forward liabilities and USD 12 billion in short-term rollovers are accounted for, usable reserves are close to zero. Much progress is still needed.

Another concern is PKR’s appreciation at a time when interest rates have been cut by half and the spread between PKR and US Treasury rates is below the historic average. This defies economic logic and risks undermining the long-term potential of exports. Major textile exporters are hesitant to expand capacity for new orders because high costs and taxation have eroded profitability, weakening the case for fresh investment.

That SBP is fulfilling its mandate is a fact. It should maintain a cautious monetary stance and continue buying dollars, even if this leads to a modest PKR depreciation, as such measures effectively forestall market panic. The real issue, however, lies with the finance ministry in particular and the government in general that have yet to implement essential reforms.

Pakistan cannot break out of its low-growth trap without structural reforms in fiscal and energy sectors. Taxation remains excessive for the formal sector, while the informal economy continues to enjoy implicit exemptions.

There has been no meaningful progress on FBR (Federal Board of Revenue) reforms, nor is there any political will to bring undertaxed segments into the net.

Similarly, inefficiencies in energy distribution companies are passed on to consumers via higher tariffs. Industrial consumers cross-subsidise low-end households, undermining manufacturing competitiveness. The government has also stalled on privatising loss-making SOEs.

It is increasingly clear that current stability may hold the economy at its present level, but without reforms, efforts to climb the growth ladder and expand employment will falter.

Consolidation and stabilisation will eventually lose ground because the underlying foundations remain weak, an issue that is beyond the SBP’s mandate.

Therefore, the pressing need is for the government to bite the bullet and launch the direly needed structural reforms in earnest with the finance ministry working in tandem with SBP to set the economy on a sustainable growth path. Without this, exports will not expand enough to meet import requirements in a high-growth environment, and the current phase of “stabilisation” will fail to attract sustained capital — whether in investment or debt inflows.

Copyright Business Recorder, 2025