The State Bank of Pakistan has reduced the rate of remuneration on the Special Cash Reserve Account maintained in US dollars to 2.69 percent for January 2026, continuing a gradual downward adjustment linked to international interest rate benchmarks. The revised rate marks a decline from 2.86 percent in December 2025 and 3.00 percent in November 2025, according to the latest circular issued by the central bank.
The remuneration rate applies to foreign currency deposits mobilised under FE-Circular 25 of 1998, a long-standing regulatory framework governing foreign exchange deposits in Pakistan. These deposits form a key component of the foreign currency liquidity management system for banks and non-bank financial institutions operating in the country.
Under the prevailing regulatory structure, banks and non-bank financial institutions are required to maintain cash reserves equivalent to 25 percent of their total FE-25 deposits with the State Bank of Pakistan. This reserve requirement is divided into two components: five percent is maintained in a Cash Reserve Account, while the remaining 20 percent is placed in a Special Cash Reserve Account. The Cash Reserve Account does not earn any return, whereas the Special Cash Reserve Account is remunerated on a monthly basis at a rate notified by the SBP.
The latest adjustment in the remuneration rate reflects changes in global short-term interest rates, as the calculation mechanism is directly linked to an international benchmark. In line with DMMD Circular Letter No. 03 of 2023, the rate of remuneration on the Special Cash Reserve Account is determined using the one-month Term Secured Overnight Financing Rate, published by CME Group on the last working day of the preceding month. From this benchmark rate, a service charge of one percent is deducted to arrive at the final rate payable by the SBP.
The Secured Overnight Financing Rate, commonly referred to as SOFR, is widely used as a benchmark for US dollar-denominated transactions and has increasingly replaced LIBOR in global financial markets. By linking the remuneration rate on foreign currency reserves to SOFR, the SBP aims to ensure greater transparency and closer alignment with prevailing international market conditions.
The gradual reduction in the remuneration rate over recent months mirrors the broader easing trend in global interest rates, particularly in advanced economies. As international benchmark rates adjust, the SBP’s formula-based mechanism automatically transmits these changes into the returns paid on foreign currency reserves held by domestic financial institutions.
For banks and non-bank financial institutions, the remuneration on the Special Cash Reserve Account represents an important, though limited, source of return on a portion of their foreign currency liabilities. While the non-remunerative cash reserve portion imposes a cost, the remunerated component helps partially offset the opportunity cost of maintaining mandatory reserves with the central bank.
From a policy perspective, the framework allows the SBP to manage foreign exchange liquidity and systemic stability while maintaining consistency with international standards. The use of a transparent, rules-based formula reduces uncertainty for market participants and limits the scope for discretionary adjustments.
The latest rate cut does not signal a change in the underlying policy framework but rather reflects the automatic operation of the benchmark-linked mechanism. Analysts note that as long as global short-term dollar rates remain on a downward trajectory, remuneration rates on foreign currency reserves in Pakistan are likely to remain under pressure.
Overall, the adjustment underscores the SBP’s ongoing efforts to align domestic regulatory instruments with global financial benchmarks, while balancing the needs of financial institutions and maintaining prudent oversight of foreign currency liquidity within the banking system.
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