SBP’s dollar-buying hunger

The hallmark of SBP’s performance over the last four years has been its management of external accounts. SBP’s gross reserves have increased from a low of USD3 billion at the start of 2023 to USD21.5 billion as of now. Additionally, its forward liabilities have declined by almost $4 billion.

Thus, the overall improvement stands at USD22.5 billion, while total external debt and liabilities have increased by $10.2 billion from January 2023 to June 2026 (forex reserves are up by USD15.3 billion during this period).

Thus, the overall net increase of over USD9 billion is solely due to purchases from the interbank market. And that number must have grown further so far this fiscal year.

The latest data show that in Jul-26, SBP bought USD863 million from the interbank market despite running a current account deficit of USD445 million. In the previous month (Jun-26), SBP bought $841 million despite a current account deficit of USD836 million. According to official data, from Jun-24 to Jul-26, SBP bought USD17.2 billion from the interbank market.

As per the SBP Governor’s remarks at the post-monetary policy press conference, the central bank has bought USD30 billion from the interbank market over the last four years.

Around USD12 billion was used for interest payments, while the rest has been used to build reserves. That is comforting news and has helped Pakistan move from the verge of default to a position where it is navigating the current oil crisis well. This, along with positive real interest rates and an improved fiscal position, has helped tame inflation.

SBP is following a formula that keeps bank treasuries on their toes but works well for the country. For the past three years or so, SBP has implicitly not allowed banks to buy foreign currency from other banks. Whatever surplus they have at the end of the day must be surrendered to SBP, which then becomes part of the central bank’s dollar purchases.

Thus, banks have to arrange dollars internally from exports and remittances to finance imports and other payments. They charge higher rates for imports while offering discounts on remittances. Earlier, the government was providing rebates on remittances, but now banks are bearing this expense out of their own pockets. On average, banks are offering a discount of Rs2–2.5 per dollar.

That is helping remittances grow through formal banking channels. Banks are hungry for remittances, and they are competing not only with one another but also with the informal market, which is at a disadvantage following the crackdown a couple of years ago.

Additionally, inflows are improving as the outflow of money from the market following the war appears to have stopped (or slowed down). Against this backdrop, SBP has increased its FY27 remittances target to USD45 billion.

SBP means business, as it continues to buy dollars aggressively from the market even today. Import cover has improved from two weeks to over three months. But SBP demands more. It is hungry for dollars and is making life difficult for bank treasuries. The central bank has revised its reserves target upward to USD23 billion for December 2026 and USD25 billion for June 2027. SBP wants more.

That is the right strategy. SBP should keep building reserves. However, it should not single-handedly squeeze the banks. Rather, it should also use currency pricing as a policy tool.

The REER published by SBP stands at 109—its highest level since 2018. Whenever someone argues for allowing the currency to adjust, SBP starts talking about its buying spree (mentioned above). That is good, but not enough.

Nonetheless, no one at SBP or in the government wants the PKR to depreciate. They fear that depreciation could create a negative feedback loop, potentially triggering dollarization. SBP is considering buying more dollars from the market and is planning to issue a dual-currency bond.

Hence, the authorities want to keep the rupee stable while continuing to buy dollars.

That may help build reserves, but it may not allow the economy to grow beyond 4 percent. To achieve higher growth while continuing to build reserves, SBP must allow the currency to adjust while managing market anxiety. But that may not happen anytime soon.