The State Bank of Pakistan (SBP) has made significant strides in strengthening the country’s foreign exchange reserves, purchasing a total of USD 7.8 billion from the market between June 2024 and May 2025. This move, including USD 522 million in May 2025 alone, was aimed at safeguarding the economy from external shocks and bolstering reserves.
During a recent briefing to the National Assembly’s Finance Committee, SBP officials shared insights into the country’s monetary policy, forecasting a 0-1% current account deficit and inflation staying within the target range of 5-7% for the fiscal year 2025-26. This conservative stance is meant to ensure stability and avoid any boom-bust cycles in the economy.
Economic Growth and Inflation Control
The SBP emphasized that macroeconomic stability had been achieved thanks to its prudent monetary policy. This strategy has not only led to a sharp decline in inflation but also helped stabilize inflation within the target range. Economic growth in FY2025 was 2.7%, with FY2026 projections set between 4% and 4.7%. Over the last decade, the average growth rate was recorded at 3.4%.
FX Reserves: Vital for Economic Health
The central bank highlighted that foreign exchange reserves are projected to reach USD 15 billion by December 2025, with an increase to USD 17.5 billion by the end of the fiscal year. However, the comfort level for reserves is considered to be USD 20 billion, sufficient to cover three months of imports, which aligns with international standards.
Despite improvements in reserves, SBP officials emphasized that further accumulation of foreign exchange buffers remains essential for long-term economic health. The officials clarified that, while floods have not yet had a major impact, the projections may change if the situation worsens.
Concerns Over Dollar Purchases and Interest Rates
A significant discussion during the committee meeting was regarding the US Dollar’s market access. Members raised concerns about the impact of SBP’s dollar purchases on the rupee’s value, pointing out that the rupee could have depreciated if the SBP had not intervened. In response, SBP officials noted that while a stronger Pakistani Rupee (PKR) could encourage more imports, it could ultimately lead to a wider external account gap.
The SBP officials also responded to criticism of their conservative monetary policy, with the interest rate currently at 11%, a full 4% above the target inflation of 5-7%. The officials explained that these rates are designed with future concerns in mind, as inflation is expected to trend upward. They further added that the Monetary Policy Board takes into account multiple factors and includes three independent members.
Future Outlook and Potential Adjustments
As the Monetary Policy Meeting scheduled for September 15 approaches, some committee members, including Javed Hanif and Sharmila Farooqui, raised concerns about the current interest rate’s alignment with real-world inflation levels. The SBP officials assured the committee that the situation is being carefully monitored and that adjustments to the interest rate will be made as necessary to maintain stability.
In conclusion, SBP’s approach continues to focus on achieving price stability and financial stability, while adapting to global and domestic challenges. However, the committee remains concerned about the overall effectiveness of the policy and the potential impact on Pakistan’s growth in the coming months.
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