The star economic performer in the last two years is the State Bank of Pakistan. The central bank’s foreign reserves are up by $8.8 billion in the last twenty-three months (from February 2023 to December 2024), and its forward liabilities are reduced by $2.6 billion at the same time. On a net basis, the increase is at a whopping $11.4 billion, and that largely explains the economic stability that has been achieved.

This would not have been possible without SBP buying from the interbank market. SBP Governor reportedly said that SBP bought $9 billion (on a net basis) from the interbank market in 2024 (the last twelve months), and within it around half the amount is purchased in the last six months. As per the published data, SBP bought $1.9 billion in three months (June to August 2024).

Some analysts are speculating that if SBP had not bought the dollars from the interbank market, the PKR could have appreciated 240 against the USD. Yes, there could be some room for currency appreciation if the SBP was not buying. However, we cannot conduct the analysis in isolation, given the presence of other variables that directly influence the currency value.

Since 2023, there have been implicit restrictions on banks in terms of managing forex demand. In other words, they cannot buy dollars from other banks and must sell surpluses to SBP. This restriction had allowed SBP to buy in bulk; otherwise, imports could have increased, the current account could have been in deficit, and the currency would have faced depreciation pressure.

The above-explained narrative largely applies to 2023. In most of 2024, there was a genuine case of demand suppression due to tight monetary and fiscal policies and massive purchasing power erosion. Thus, SBP buying—especially in 2HCY24—is perhaps due to unrestricted higher supply in the interbank market. However, currency appreciation might not be the case if the SBP is not buying dollars.

Not all the current account payments are made by the interbank. SBP directly handles the majority of the public debt servicing cost, which is part of the current account. With around $100 billion in public debt, at roughly 4 percent cost, the debt servicing cost SBP $4 billion in 2024. If SBP hadn’t purchased from the interbank market, this could have resulted in a significant depletion of its reserves.

And falling reserves have an implication for currency value. Remember January 2023 when currency moved from 220 to 260s in a jerk? That was a time when SBP reserves were nosediving, and because of that, there was a run on PKR. Similar was the case in February and May 2022, when sharp currency depreciation correlated with nosediving reserves.

Yes, there are other economic and political factors contributing to the mayhem in both cases. However, the outcome is the same: currency depreciation is linked to reserves decline.

Therefore, if SBP hadn’t been purchasing dollars, there could have been a surplus in the interbank market, potentially leading to a brief appreciation of the currency. And banks could have used the amount to finance imports. At the same time, SBP reserves might have been falling, and that could have triggered another panic button.

It’s best to avoid it, and the credit goes to SBP for not letting this happen.