Debt, Dollars, and the Missing Answers: Unpacking SBP’s Quiet FX Market Moves

Pakistan’s State Bank has quietly withdrawn over USD 7.2 billion from the local foreign exchange market in just eleven months — largely to meet external debt obligations. While market watchers had long suspected this, the official figure now confirms it. Yet, the bigger puzzle remains: how this intervention was carried out and what its monetary side effects might be.

If, as past patterns suggest, these dollars were purchased using newly created rupees, then the inflationary fallout should have been openly addressed. It wasn’t. Such large-scale dollar buying inevitably raises questions about liquidity injections into the economy — unless fully sterilised — and there’s little evidence from SBP’s public reports to suggest such sterilisation took place.

Not About Building Reserves

Interestingly, less than USD 1 billion of this activity contributed to actual reserve accumulation. The bulk went straight into debt repayments, indicating the real motive was liability management, not reserve building. That shifts the nature of this action from a purely monetary move to one with strong fiscal undertones. This raises an uncomfortable question: was this the SBP acting independently, or operating in sync with the finance ministry’s agenda?

Inflation Risks Looming

Inflation had been slowing for months, but is now edging upward again. While the recent uptick isn’t alarming yet, history shows this is how prolonged inflationary cycles begin — quietly, with liquidity injections that aren’t publicly acknowledged. The last such episode left Pakistan enduring over 30% inflation for months, a crisis still fresh in public memory.

For a central bank that champions “transparency” and “autonomy,” this silence is troubling. If the dollar buying was offset by draining equivalent rupee liquidity, the SBP should say so. If not, the public deserves to know how inflation forecasts were adjusted, and whether the Monetary Policy Committee formally approved this approach — or if it happened off the books as part of fiscal damage control.

Why the Process Matters

Managing reserves and debt is standard practice for any central bank. But in a fragile macroeconomic environment, trust hinges not just on outcomes, but on the process. Quiet interventions in the FX market, without clear communication, risk undermining that trust.

If SBP’s actions are adding to inflationary pressures, even indirectly, it must acknowledge it. If they aren’t, it must explain the safeguards. Until then, speculation will fill the gap — and speculation is the last thing Pakistan’s economy can afford right now.

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