The State Bank of Pakistan (SBP) has substantially strengthened the country’s external financial position through sustained purchases of foreign currency from the interbank market, increasing its gross reserves from approximately $3 billion at the beginning of 2023 to around $21.5 billion by October 2026. According to an analysis published by Business Recorder, the central bank’s forward liabilities have also declined by nearly $4 billion, contributing to an overall improvement of approximately $22.5 billion in its external position. The analysis noted that total external debt and liabilities increased by $10.2 billion between January 2023 and June 2026, while foreign exchange reserves rose by $15.3 billion during the same period. It attributed the resulting net improvement of more than $9 billion primarily to the SBP’s purchases from the interbank foreign exchange market, highlighting the importance of these transactions in rebuilding the country’s reserves.
The central bank continued purchasing dollars even when Pakistan recorded current account deficits. In July 2026, the SBP bought $863 million from the interbank market despite a current account deficit of $445 million. In June, it purchased another $841 million while the current account deficit stood at $836 million. Official data cited in the analysis showed that the central bank had purchased $17.2 billion from the interbank market between June 2024 and July 2026. Governor Jameel Ahmad also stated at a post-monetary policy press conference that the SBP had purchased approximately $30 billion from the market over the preceding four years. According to the analysis, around $12 billion was used for interest payments, while the remaining amount contributed to reserve accumulation and other external financing needs.
The reserve-building strategy has helped improve Pakistan’s capacity to meet external payment obligations and manage financial pressures. Import cover, which measures how long a country’s foreign exchange reserves can finance its imports, has increased from approximately two weeks to more than three months. The analysis linked the stronger external position, positive real interest rates and an improved fiscal position with the easing of inflationary pressures. These developments have helped Pakistan move away from the severe external financing stress experienced in earlier years. However, maintaining the improvement requires continued access to foreign exchange, effective management of debt repayments and sufficient inflows to cover imports and other international obligations. The central bank’s continued purchases indicate that it intends to strengthen these buffers further rather than treat the current reserve position as sufficient.
The SBP’s approach has also affected how commercial banks manage their foreign currency operations. According to the analysis, the central bank has followed a practice under which banks have limited opportunities to purchase foreign currency from other banks, with surplus dollars at the end of the trading day being surrendered to the SBP. As a result, commercial banks must arrange foreign currency through sources such as export proceeds and remittances to meet the requirements of importers and other customers. The analysis said banks have been charging relatively higher rates for import transactions while offering discounts to attract remittances. Banks are reportedly providing discounts averaging Rs2 to Rs2.50 per dollar, with the cost now being borne by the banks rather than supported by government rebates. This arrangement has increased competition among financial institutions seeking to attract foreign currency inflows through formal channels.
Competition for remittances has become particularly important as Pakistan seeks to strengthen its external accounts. Commercial banks are competing with one another and with informal money transfer channels to attract funds sent by overseas Pakistanis. The analysis suggested that enforcement measures against informal foreign exchange activity, introduced in earlier years, have affected the competitive position of the informal market. It also noted that the outflow of funds associated with the war appears to have stopped or slowed, potentially improving the availability of foreign currency. Against this background, the SBP has raised its remittance target for the current fiscal year to $45 billion from its previous forecast of $44 billion. Higher remittance inflows can support household income and provide foreign exchange for the economy, although achieving the target will depend on the volume of transfers and the extent to which funds continue to move through formal channels.
The central bank has maintained an ambitious timetable for further reserve accumulation, targeting $23 billion by December 2026 and $25 billion by June 2027. While the analysis supported continued reserve building, it also questioned whether relying heavily on dollar purchases without sufficient adjustment in currency pricing could constrain banks and limit broader economic growth. It cited the State Bank’s Real Effective Exchange Rate (REER) index at 109, its highest level since 2018, as part of the debate over the rupee’s valuation. The REER measures a currency’s value against the currencies of trading partners while accounting for relative price differences. A higher reading can inform assessments of currency competitiveness, but it does not by itself determine whether a currency is overvalued or establish the appropriate exchange rate. The analysis argued that currency pricing should be considered alongside reserve accumulation as part of the central bank’s wider policy framework.
Policymakers have reportedly remained reluctant to allow significant rupee depreciation because of concerns that a weaker currency could increase inflation, encourage people to hold dollars and create further pressure on the foreign exchange market. The analysis also referred to the possibility of the SBP purchasing additional dollars and plans for a dual-currency bond. Maintaining currency stability while continuing to accumulate reserves may help contain uncertainty, but the approach presents a policy challenge if it restricts the adjustments needed to support exports and economic activity. The analysis argued that Pakistan could struggle to achieve economic growth above 4% if the exchange rate remains tightly managed without broader adjustments. Ultimately, the central bank faces the task of balancing reserve accumulation, exchange rate stability, banking sector pressures and the need for stronger economic growth. The outcome will depend on how monetary authorities manage foreign currency supply, remittance inflows, external payments and the rupee’s competitiveness in the coming months.
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