Is stability enough?

Pakistan’s macroeconomic position is more settled today than it has been in some time. Inflation has receded from painful highs, foreign exchange reserves have improved, the rupee has steadied, and the current account is under less strain. After repeated balance-of-payments crises, this is a welcome measure of relief.

Yet stabilisation should not be mistaken for recovery. The more important question now is whether Pakistan is beginning to rebuild the real economy, or merely restoring comfort to the financial system.

The distinction matters because stability is a means rather than an end. Its value lies in creating the conditions for investment, productivity, employment and rising incomes. If stabilisation becomes a substitute for growth, Pakistan may once again find itself in a period of calm that proves less durable than it appears.

In that context, two State Bank instruments merit closer attention: Open Market Operations (OMOs) and foreign exchange purchases.

OMOs may appear technical, but their effect is straightforward. The SBP injects liquidity into the banking system by creating reserve money and lending against government securities. In normal circumstances, such operations help align short-term interest rates with policy and ease temporary liquidity pressures.

In Pakistan, however, the scale of these operations has become large enough to raise a broader question: whether a temporary liquidity instrument is taking on the characteristics of a more structural support for the banking system.

At the same time, the SBP has been purchasing foreign exchange in significant volumes to rebuild reserves. That is understandable. Pakistan’s history of external vulnerability makes a stronger reserve position both prudent and necessary. Higher reserves improve confidence and provide protection against future shocks.

Even so, reserve accumulation is not without cost. Every dollar absorbed by the central bank is a dollar unavailable to the private sector. Even without formal import restrictions, large-scale reserve purchases can have effects similar to import compression. Had more foreign exchange remained in the market, the rupee might have appreciated further, imported machinery and industrial inputs could have become less expensive, and firms may have found expansion easier. The counter-argument is that an already weak export sector would have faced a less supportive exchange rate.

A similar concern arises with OMOs. Much of the liquidity injected into the banking system appears to circulate within a relatively closed loop involving the government, commercial banks and the central bank itself.

The government borrows through Treasury Bills and bonds. Banks purchase these instruments because they offer attractive returns with relatively low risk. The SBP then supplies liquidity through OMOs, making it easier for banks to continue holding large volumes of government debt, while the central bank earns income on the assets it holds.

That matters because the liabilities the SBP creates are extremely cheap. When it expands money through OMOs or foreign exchange purchases, it receives income-generating assets in return. Even after sterilisation and operating costs, it can still earn substantial profits, some of which flow back to the federal government.

The result is a mutually reinforcing arrangement: the government secures financing, banks earn strong returns on public debt, and the central bank generates income that partly flows back to the state.

There is nothing inherently improper in this. Central banks everywhere manage liquidity and transfer profits to governments. The more important question is what such a system ultimately encourages.

When too much of the financial sector becomes oriented towards financing the state, the incentive may shift away from directing capital to productive activity. Resources that might otherwise support manufacturing, technology, exports, agriculture, mining, tourism and employment are instead recycled through public borrowing and financial intermediation.

This helps explain Pakistan’s present paradox. Inflation had eased before the latest Middle East tensions, reserves have improved, yet private investment remains subdued, industry is still struggling to regain momentum, and job creation remains insufficient for a rapidly growing population.

To be fair, the IMF-supported programme does not forbid reserve accumulation or prudent liquidity management. Pakistan needed a period of stabilisation, and rebuilding reserves was necessary. Nor should the SBP be faulted for trying to restore monetary and financial order.

The next phase is critical. A current account improvement driven by exports, productivity and investment-led growth is fundamentally different from one produced by weak demand, compressed imports and reserve accumulation. The former is more durable; the latter more fragile.

Pakistan undoubtedly needed a period of stabilisation. But stabilisation must now give way to broader economic renewal. Reserve accumulation should increasingly be supported by stronger exports rather than weaker imports. Liquidity in the financial system should increasingly support productive private investment rather than remain concentrated in public borrowing. And fiscal sustainability should rest less on a government-bank-central bank loop and more on a broader tax base, stronger business activity and higher growth.

In the end, economic success cannot be measured only by reserves, inflation or the current account. It must be measured by whether ordinary Pakistanis are earning more, finding better jobs, building stronger businesses and seeing a credible path to greater opportunity.

Stability is essential. But if it chiefly improves financial balance sheets while leaving the productive economy short of capital, it cannot by itself deliver prosperity. At best, it offers respite rather than lasting progress.

Copyright Business Recorder, 2026