THE State Bank left the interest rate unchanged this week, surprising some observers, but it had good reason to do so. In the narrative it built to support its decision, the State Bank effectively argued that that battle against inflation has been won, but the battle to rebuild the external sector remains a work in progress despite significant strides.
These are the two large battles in the war the country waged against economic volatility since July 2023. I use that date because that is when Pakistan had veered perilously close to the edge of a sovereign default and was rescued by an extraordinary bailout arranged by the IMF, China, Saudi Arabia and the UAE. Had that bailout not come, the country was going to shut down, perhaps within weeks. We move on too fast and forget too much in this country.
Two tasks were of the utmost urgency starting then. First was to douse the flames of the inflation that had engulfed the country since early 2021, rising to an unprecedented inferno by May 2023. Never had we seen inflation reach 38 per cent year on year like we did that month. And never had we seen devaluations of the sort that began to hit in 2021. By the time that wave of devaluations peaked a few years later, the dollar had nearly tripled in value against the rupee. Never have we seen a devaluation of this magnitude in such a short period of time.
Two successive IMF programmes have been required to pull back from the brink of this near catastrophic volatility that ran between 2022 and 2023. The first was the Stand-by Arrangement in July 2023, and the second was the Extended Fund Facility (EFF) in September 2024. The latter programme is still running, and going by the numbers it contains, Pakistan is still far from being out of danger.
Against the depletion of foreign exchange reserves, the battle is still on.
When the EFF began Pakistan’s Net International Reserves (NIR) were negative $11 billion. If you took all the money Pakistan owed in the short term out of the reported foreign exchange reserves, you were left $11bn in the hole. That’s how dire the situation was. This number had gone negative in 2017 for the first time after a few decades, and had barely managed to reach the zero line a few years later, when it plunged once again when the external sector drains of the PTI’s much-vaunted growth rates began.
The Fund programme set a stringent timeline for raising this figure, slowly but surely, back up to the zero line. At the time of signing, the Fund targeted that Pakistan’s NIR should break into positive territory by 2028, four years into the future. Based on that timeline, Pakistan is slightly ahead of the curve. By now the NIR were supposed to be aiming for a target of negative $7.5bn. The data shows that they were at negative $6.6bn by September of 2025 and could realistically touch negative $4.8bn by June of this year, if things keep moving as they are.
This is good news certainly. But notice the figure is still negative, meaning all the dollars and gold and other reserve assets that the country has are still overshadowed by the claims that non-residents have on the country. To put it simply, we owe more than what we have when it comes to foreign exchange, and while that is the case, the country cannot be said to be ready to grow.
A war began in July 2023. A war against catastrophic economic volatility. That volatility was showing up in two areas: inflation and foreign exchange depletion. Each front required a full-fledged battle to put the fire out. Against inflation they won the battle many months ago. But against the depletion of foreign exchange reserves, the battle is still on.
This is probably one of the reasons why the State Bank is so aggressive in ‘buying’ dollars from the banks. I put the word buying in quotation marks because banks don’t always get to decide the price at which they will sell these dollars, and in some cases they don’t even get to decide whether they will sell or not. What is puzzling, however, is the sheer zeal with which this goal is being pursued, to the point where they are over-performing on the targets set by the IMF. In September and October of 2025, for example, they bought up more than a billion dollars each month. This is unusual.
The long hard slog to bring the foreign exchange reserves back into positive territory is going to continue for at least another year to 18 months — despite the over-performance so far. To do this, it is necessary not only to accumulate reserves, but also to retire the liabilities that were built up during the period of the great volatility of 2022 and 2023. The improvement is happening but it is far from over. And the last thing the economy can afford at this time is a resurgence of the trade deficit to act as a drain on the reserves.
This is what the State Bank pointed to in its monetary policy announcement. It pointed out that “economic activity continues to gain momentum faster than anticipated” and that “the trade deficit has widened in the wake of a substantial increase in imports”. These trends are expected to gather more momentum, it says, upgrading its growth forecast slightly to the 3.75- 4.75 range, with the possibility that “[t]his economic momentum is likely to strengthen further in FY27”.
The economy has started showing signs of an incipient revival with the result that the current account immediately registered a deficit of $1.2bn in from July to December. This is manageable. But the wheels can come off very fast if this trend picks up. So the State Bank has done the right thing to not juice the trajectory further. The battle to rebuild reserves is still on.
The writer is a business and economy journalist.
Published in Dawn, January 29th, 2026
