Foreign exchange reserves are meant to be strengthened through exports, investment inflows and remittances – in short, through the real earning capacity of the economy. When a central bank has to repeatedly purchase dollars from the domestic market to shore up reserves, it is essentially recycling liquidity rather than generating it. In Pakistan’s case, the scale of these interventions is particularly concerning.
Absorbing $24 billion from the market inevitably tightens dollar supply and keeps the rupee under pressure, pushing the cost of imports higher and adding to inflationary stress across the economy. Equally troubling is what this reliance says about the broader economic framework under the ongoing IMF programme. Stabilisation was meant to restore investor confidence and encourage non-debt creating inflows. Yet the central bank’s own admission suggests that such inflows remain insufficient, forcing policymakers to rely on market operations to maintain reserves level.
The policy response, therefore, must move beyond short-term balance sheet management. Pakistan urgently needs a credible export-led strategy that expands value-added manufacturing and improves energy reliability for exporters. Equally important is the need to attract stable foreign investment by ensuring policy consistency and reducing regulatory uncertainty. At the same time, curbing non-essential imports and promoting domestic substitution where feasible can help ease pressure on the current account. Projections that reserves may climb to $18 billion by June and exceed $20 billion by the end of the year will offer some comfort. But reserves built primarily through market absorption provide only a fragile shield against external shocks.