The IMF review has gone through. Reserves, which had flatlined around $14.5 billion for months, will finally get a breather. Inflation, though losing the base effectcushion from 2025, may still manage to stay within the target band, provided energy adjustments behave. Come 2026 forecasts, markets shall herald a smoother glide path, while the finance ministry declares for the umpteenth time that stabilization has taken hold.
Yet within the Fund’s careful language, the real message remains unchanged. In the absence of any meaningful structural reform, the only anchor left is “sufficiently tight” monetary policy. Keep the interest rate where it is, and do not blink.The problem is that interest rates alone do not hold currencies forever. They buy time, but nothing more.
The Fund congratulates the authorities for maintaining a primary surplus and meeting quantitative targets despite the floods. But none of the underlying distortions that repeatedly drag Pakistan into crisis have been addressed: tax base remains narrow as SOEs bleed. Exports are, fearfully, stagnating,even as governance reforms remain a talking point. Meanwhile, climate risks intensify.
In this vacuum, the exchange rate becomes the locus of stability. The question is not so much as whether the central bank should defend the currency. It is whether the country has the conditions precedent to keep the currency from slipping on its own.
The macro configuration is clear. CPI can, and may just, stay within the 5 to 7 percent band. The policy rate sits at 11 percent, and the Fund has laid bare that it shall stay so. The real interest rate remains 4 percent. That means the spread over the federal funds rate is 6 to 7 percent. On paper, this should support the rupee. But Pakistan’s crises never emerge out of theory alone. They emerge in the gaps between theory and execution, and in the spaces where political incentives hijack economic logic.
The challenge is breathtakingly simple:how long can the central bank hold the line on currency at its current level if structural reform remains frozen? Pakistan’s exchange rate stability basically rests on five pillars. None are new, even as the country consistently fails to secure them.
First, external financing must remain predictable. Not just in volume but in timing. The rupee holds largely because markets believe dollars will arrive when the calendar says they should. The level of reserves matters less than the credibility of the pipeline. Delay a bilateral rollover or slow a multilateral disbursement and the foreign exchange market reacts instantly.
Second, imports must remain aligned with available foreign exchange, while maintaining the import cover at Fund’s projected level: above 2.5 months. Pakistan achieved its current account improvement by suppressing imported demand. That strategy inevitably comes with a timebound expiry. True stability requires importbehaviour that responds to income, not administrative controls. When demand revives before competitiveness does, the exchange rate moves.
Third, the inflation differential with trading partners must stay narrow. If domestic prices rise faster than global prices, the real exchange rate appreciates internally even when the nominal rate appears stable. Already, REER is showing signs of unease. Soon, the pressure could works its way into the currency. Sustained low inflation is therefore the most effective line of defense that does not involve burning forex reserves.
Fourth, the fiscal stance must remain credible. A durable primary surplus signals that monetary policy shall not be undermined by fiscal indiscipline. The moment fiscal policy begins to lean on deficit led expansion, exchange rate expectations shall begin to shift. The rupee has collapsed in every past episode where fiscal and monetary objectives diverged.
Fifth, credible exchange rate flexibility must continue. The rupee remains stable when markets believe the central bank will not reimpose administrative controls. Speculation thrives on one-way bets. Remove the possibility of manipulation and speculative behavior fades.
Theoretically, these conditions together can sustain the currency longer than most commentary assumes. But the fact that Pakistan must depend on them so heavily reflects the deeper problem. The rupee is being held in place by a set of constraints rather than by any underlying strength.
A theoretical framework helps clarify the limits. The interest rate differential vis-a-vis the US is significant;as a result of sustained and positive real rates. Under standard macro models, this should encourage inflows, temper outflows and stabilize expectations.
But those models assume a stable risk premium. Pakistan does not have one. Political volatility, delayed reforms, energy circular debt, revenue slippages and climate shocks all feed into a risk premium that refuses to sit still. Once that premium widens, no interest rate differential is large enough to hold the currency.
In practice, the rupee is not being defended by the policy rate. It is being defended by the IMF review schedule. Currency stability is a by-product of program credibility. The moment credibility wavers, the exchange rate absorbs the shock.
Three risks stand out. First, a disruption in external financing timing would weaken confidence in the exchange rate before any reserves are drawn. Pakistan’s foreign exchange market is extremely shallow, meaning a small imbalance can produce large movements.
Second, areacceleration of inflation through delayed energy adjustments would erode the real interest rate and change inflation expectations. When inflation expectations shift, currency expectations shift with them.
Lastly, a revival of domestic demand without export recovery would widen the current account deficit. The exchange rate always reacts before policymakers do.
These risks are obvious. In addition, Pakistan has done none of the structural work needed to support the rupee in a sustainable sense. The country still has not raised productivity nor diversified its export base. It has neither taken tangible steps to fix energy sector inefficiencies. It has not addressed tax policy distortions or reduced the footprint of the state. Without these reforms, the exchange rate is forced to behave as a pressure valve rather than a signaling device.
The IMF review may be complete, but stability is conditional. The current stance can hold the rupee for a while, but not indefinitely. Interest rates simply delay the adjustment, not permanently eliminate the inevitability.
How long can Pakistan hold the currency at its current level?One, as long as the program holdsthe external financing calendar behaves. As long as inflation stays contained;and, as long as political incentives do not overwhelm economic logic.
In other words, for a while, but not forever. If 2026 marks the return of political volatility; that thinly held equilibrium might unravel after all.
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