On unstable ground

2026-03-06 - 04:13

PAKISTAN’S economic managers repeatedly tout improvements in macroeconomic indicators, including rising foreign exchange reserves, a stable currency, contained inflation and the current account surplus achieved last year. But a closer look at both numbers and public sentiment reveals a more complicated reality. State Bank Governor Jameel Ahmad’s disclosure that the central bank purchased $24bn from the market over the past three years to build foreign exchange reserves offers an important insight into the true state of the country’s external sector. While the headline figure of rising reserves may seem reassuring, the way they have been accumulated raises questions about sustainability. Essentially, Pakistan has been rebuilding its foreign exchange reserves largely by buying dollars already circulating within the local market rather than attracting fresh inflows from exports, foreign investment and other non-debt creating sources. This strategy may have helped temporarily shore up reserves, but has not strengthened the external sector’s foundations. Even the current reserve position reflects significant dependence on external support. Of the roughly $16bn the SBP holds in reserves, over three quarters of it consists of deposits by friendly countries. These funds may provide some breathing space, but they also underline the structural weakness of our external accounts. The UAE’s shift from annual to monthly rollovers of its deposits has added yet another dimension to these weaknesses. While not an immediate threat, it underpins the limits of dependence on the goodwill of friendly countries. The escalating conflict in the Middle East will further test balance-of-payments vulnerabilities as Pakistan relies heavily on imported oil, making the economy highly sensitive to global price shocks. If crude oil prices were to rise to $100 per barrel, our monthly import bill could increase by up to $300m. Such an increase would quickly widen the current account deficit and put renewed pressure on reserves and the exchange rate. That harsh economic conditions are affecting investor and public confidence is to be expected. As a new survey shows, only one in four Pakistanis believes the economy is strong; the majority view it as weak. Even more worrying is the lack of faith in the future. Barely a third of respondents expect economic conditions to improve in the next six months, and only 16pc expressed confidence in making investments. Such pessimism is understandable. For many households, the macroeconomic ‘stabilisation’ touted by policymakers has yet to translate into meaningful relief. Poverty levels have risen, job opportunities have shrunk and the benefits of economic recovery are unevenly distributed. Our policymakers face a dual task. On the one hand, they must continue managing external sector risks, including volatile energy prices and fragile reserves. On the other, they have to focus on structural reforms that can attract investment, boost exports and create jobs. Published in Dawn, March 6th, 2026