Pakistan’s latest monetary data tells a deeper story than most headlines capture. The State Bank of Pakistan’s net Open Market Operation (OMO) injections, the liquidity provided to commercial banks, have surged from near-zero or briefly negative levels in 2016-2019 to approximately PKR 14.3 trillion by mid-2026, having briefly touched PKR 15.7 trillion in early April. This is not merely a technical banking statistic. It reflects a profound structural shift in the country’s economic architecture.
Traditionally, OMOs are short-term instruments used by central banks to smooth temporary liquidity fluctuations in the banking system. In most economies, these interventions are cyclical and reversible. Pakistan’s case is different. Liquidity injections have become persistent, large-scale, and increasingly structural. The implication is clear: the banking system is growing dependent on the central bank to sustain government financing needs.
The underlying mechanism is straightforward. As fiscal deficits widened after COVID-19, devastating floods, energy subsidies, exchange-rate pressures, and rapidly rising debt-servicing costs, the government turned heavily toward domestic borrowing. Commercial banks eagerly absorbed government securities because they offered high, virtually risk-free returns at elevated interest rates. To sustain this process, banks themselves increasingly required liquidity support from the State Bank, resulting in the explosive growth of OMOs’ that the data so starkly reveal.
Economists describe this phenomenon as “fiscal dominance,” a condition in which monetary policy becomes subordinated to the financing needs of the state. In theory, an independent central bank should primarily focus on inflation control and monetary stability. In practice, however, excessive government borrowing can force central banks into a balancing act where maintaining fiscal solvency takes precedence over controlling inflation.
This dynamic creates a dangerous feedback loop. High interest rates, intended to fight inflation, simultaneously increase the government’s debt-servicing burden. Larger interest payments then widen fiscal deficits, forcing even more borrowing from banks, which in turn increases dependence on central bank liquidity injections. Monetary tightening thus paradoxically fuels the need for additional liquidity support.
The implications extend beyond inflation. One of the most damaging long-term consequences is the crowding out of private investment. Banks naturally prefer lending to the government because sovereign debt offers attractive yields with minimal risk and regulatory advantages. As a result, credit to businesses, exporters, manufacturers, and entrepreneurs becomes relatively less attractive. The economy gradually shifts away from productive investment toward a state-financed financial structure.
Economic history shows that countries trapped in prolonged fiscal dominance often experience slower productivity growth, chronic inflation vulnerability, weak currency performance, and declining investor confidence. Pakistan is far from hyperinflation or systemic banking collapse, but the current trajectory signals increasing macroeconomic fragility.
There is also a deeper institutional concern. Persistent reliance on central bank liquidity weakens the credibility of monetary policy itself. If markets begin to believe that the State Bank cannot independently tighten conditions without destabilizing government finances, inflation expectations become harder to anchor. Confidence in the currency and long-term economic planning suffers accordingly.
To be clear, OMOs are not inherently problematic. During crises, central bank liquidity support can stabilize financial systems and prevent disorderly market conditions. The concern arises when emergency tools evolve into permanent features of economic management.
Pakistan’s banking system remains profitable and operational, largely because government borrowing continues to generate substantial returns for financial institutions. But a sustainable growth model cannot rely indefinitely on banks financing the state while productive sectors struggle for capital.
The steep, unbroken rise in OMOs from 2022 onward should therefore be viewed not as an isolated monetary phenomenon, but as a warning signal about the broader direction of economic policy. Without meaningful fiscal reform, stronger revenue mobilization, and a revival of private-sector investment, Pakistan risks drifting toward an increasingly state-dependent and low-growth equilibrium.
Copyright Business Recorder, 2026
The writer has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He was a Senior Visiting fellow at the Pakistan Study Centre, Fudan University, Shanghai