brecorder48d ago
Despite attaining macroeconomic stability and the central bank’s continuous buying of dollars from the interbank market, the increase in SBP’s foreign exchange reserves at USD 4.3 billion was less than the uptick in external public debt and liabilities at USD 7.2 billion during 2025. External debt growth therefore outpaced reserves building by nearly USD 3 billion, even as the current account deficit remained a mere under USD 0.2 billion for the calendar year.This implies that even with policies designed to suppress growth and keep the current account balance manageable, fresh debt was still required to shore up much-needed forex reserves. The interesting and counterintuitive fact is that SBP’s purchases of USD 5.2 billion from the interbank market during January to October 2025 were not enough to help raise reserves net of increase in debt and liabilities.The SBP is responsible for arranging dollars for servicing government debt (principal and mark-up). This compels the SBP to buy virtually all surplus dollars arriving at bank treasuries, preventing banks from freely trading forex. This occurred despite commodity price tailwinds favouring the economy, as oil prices dipped by 15 percent in 2025.FDI remained abysmally low, and the same fate befell other external inflows (barring debt). There have been talks of investment and debt from friendly countries for three years, yet little has materialized so far.Despite this, overall economic sentiment began improving in the second half of 2025 due to three factors: geopolitical tailwinds following the skirmish with India in May, improving so-called domestic political stability after the 26th Amendment, and declining interest rates in anticipation of a contained external account and falling inflation.However, the situation may start unfolding negatively in 2026, as perhaps all these factors have been overplayed. Geopolitical headwinds appear to be re-emerging. There is visible friction in Pakistan-UAE ties, evident from the monthly rollover of UAE deposits at a higher rate of 6.5 percent, when the government had previously been confident of a two-year rollover at half the rate. Potential UAE investment in Fauji Foundation companies also remains in limbo.There has been radio silence on any incremental economic support from China. CPEC Phase-2 is completely on the back burner. There is little hope of renegotiating Chinese power sector debt, as the refusal by Chinese IPPs to waive late payment surcharges is delaying the settlement of the power sector circular debt stock, despite banks agreeing to lend at sub-Kibor rates.Growing security concerns in Balochistan have now delayed the Reko Diq financial close indefinitely, despite it being touted as a game-changer.Most importantly, the government’s warm and cordial terms with the Trump administration is losing its charm. The US has closed a trade deal with India at tariffs better than those for Pakistan. Bangladesh has also revised its tariff arrangement with the US to achieve zero duty on textile products, while importing cotton from the US. Other countries continue engaging with the US and the rest of the world, while we bask in the high of being close to Trump. The question is: why did Pakistan not pursue similar exemptions as those have been obtained by Bangladesh? Why did it not engage with other economies, as India did, to aid negotiations with the US? Even today, concerns persist about future continuation of GSP+ status from the EU.All these factors are detrimental to our export competitiveness, which remains the weakest link. Textile players in the private sector insist that recently reduced tariffs and lower working capital financing rates may not suffice to restore competitiveness, and firms may refrain from fresh investment.On the domestic front, stability is being challenged by episodes that unfolded last week, where some commentators believe space is being re-created for PTI (Pakistan Tehreek-e-Insaf) and its jailed leader. The optics are not good for the regime.Another element was declining interest rates, which fell from 22 percent to 10.5 percent, with expectations of single-digit rates at the last monetary policy review. However, the SBP (State Bank of Pakistan) rightly exercised caution and refrained from further easing. Now, secondary market yields are moving up, dampening investor sentiment.These factors are contributing to unease in the stock market, where a healthy correction cannot be ruled out. The bottom line is a sequence of negative developments for the regime, with continued firefighting to build reserves through tight fiscal and monetary policies. Hence, the struggle to regain growth momentum persists.Reliance on external debt, particularly from multilaterals, is growing, as 2025 saw a higher increase in debt from the IMF, World Bank, and ADB, while no new money (or investment) came from friendly countries. Our foreign policy is already highly dependent on external financing, and the situation is not improving.The government needs to rethink its policies and work on improving domestic stability while simultaneously reducing hostility toward all neighbors. A hard state stance may not be sustainable without economic sovereignty and domestic employment opportunities.Copyright Business Recorder, 2026
