THE State Bank’s reported step to slow down its dollar purchases from the interbank market aims at refuelling liquidity to defend the rupee against the pressure on the exchange rate by the trade deficit that is widening on account of surging imports and stagnating exports. Apparently, the bank is trying to strike a balance by prioritising a liquid currency market for exchange rate stability after mopping up nearly $8bn last year. A troubling side effect of the dollar scarcity is already visible: the re-emergence of a grey market for foreign currency — the only place to buy dollars for the past several months, though at a large premium. Currency dealers have long been complaining of a liquidity crunch, as demand outstrips supply and many transactions slip outside formal channels. This creates a dual exchange rate environment that undermines transparency and trust in the system, besides triggering speculation.

The effort to keep the exchange rate stable could, however, prove fragile if the current account runs another monthly shortfall in September, pushing the entire first quarter of FY26 into the red — a worrying reversal after last year’s surplus. Such concerns are grounded in resurgent imports amid the easing of curbs on the opening of letters of credit — long a pressure point for industry — and increasing demand. Imports have risen by over 14pc in July-August. The stagnating exports meant that the trade deficit would spike to $6bn in the same period. With floods having devastated farmlands across Punjab — Pakistan’s largest agricultural producer — swelling food imports have re-emerged as a fault line. The sharp 37pc hike in the food import bill highlights both structural weaknesses in agriculture and the risk of prolonged pressure on the external account. Yet, some analysts argue that the picture is not entirely bleak. Remittances, a major source of liquidity anchoring exchange rate stability, remain steady at around $3bn a month, boosted partly by aid-linked inflows. At the same time, diplomacy has brought some comfort. The new defence pact with Saudi Arabia, renewed goodwill with Beijing, and the promise of the Panda bond and loan rollovers by it, will likely ensure currency stability for some time. But without tackling structural imbalances involving import-heavy consumption and stagnant exports, it will be tough for the central bank to keep the surging dollar demand from eventually weighing on the rupee unless inflows are strengthened further.

Published in Dawn, September 27th, 2025