As FY26 closed on June 30, the rupee ended the year at Rs278.16 against the US dollar in the interbank market, according to the State Bank of Pakistan (SBP).

For much of the year, the exchange rate remained confined to a remarkably narrow range, projecting a degree of stability rarely seen in recent years. Yet beneath this calm lies a more complex reality. The rupee’s resilience has rested less on a structural strengthening of the external sector than on a combination of official inflows, prudent monetary management and continued administrative oversight of the foreign exchange market.

The broader macroeconomic environment has nevertheless improved. Reflecting this improving but still uncertain environment, the SBP kept its policy rate unchanged at 11.5 per cent in June, signalling its commitment to containing inflationary expectations without unnecessarily restraining a still-fragile economic recovery.

The external sector presents an equally mixed picture. As of June 24, SBP foreign exchange reserves had declined to about $16.53 billion from around $17.19bn at the end of May following scheduled external debt repayments. Total liquid reserves, including commercial bank holdings, stood slightly over $22bn.

The central policy question is whether that stability can endure once exceptional external support recedes

Pakistan continues to carry a heavy external debt burden, while debt servicing absorbs a substantial share of federal revenues, limiting fiscal space for development spending. Public debt also remains above the statutory ceiling relative to GDP, underscoring the country’s continued dependence on external financing and regular debt rollovers.

Although the country is no longer confronting the acute balance-of-payments crisis witnessed in the past, reserve adequacy remains closely linked to multilateral support, bilateral assistance and continued access to international financing.

Scheduled debt repayments will continue to exert periodic pressure on reserves, while delays in the implementation of the IMF programme or adverse global developments could quickly alter the outlook.

Several recent trends nevertheless support cautious optimism. Workers’ remittances are estimated at around $42bn during FY26, the current account has remained marginally in surplus in recent months, and economic growth has gradually strengthened. These developments have collectively reinforced confidence in the exchange rate. Yet they remain largely cyclical rather than structural. Sustained stability will ultimately depend on stronger export growth, higher productivity and continued macroeconomic discipline.

Pakistan’s external trade position remains the principal source of vulnerability. During the outgoing FY26, the merchandise trade deficit widened to approximately $39.7bn, as exports fetched only $30.1bn while imports consumed $69.59bn. This highlights the persistent imbalance between export earnings and import demand.

The deterioration reflects both domestic and international challenges. Rising production costs, elevated energy prices and long-standing productivity constraints have weakened export competitiveness, while softer demand in several major overseas markets has further constrained export growth.

Although the current account remained in modest surplus during July-May FY26, that surplus narrowed sharply from the previous year, suggesting that external stability still depends more on financial inflows than on a durable improvement in the trade balance.

A further concern is reflected in the Real Effective Exchange Rate (REER), which rose to 105.2 in March 2026, its highest level since 2018. While a REER above 100 is commonly interpreted as indicating relative currency overvaluation, the indicator should be interpreted cautiously since it also reflects inflation differentials, productivity trends and changes in trading patterns.

Nevertheless, Pakistan’s elevated REER appears broadly consistent with rising domestic production costs and a relatively stable nominal exchange rate, both of which may have eroded price competitiveness in export markets. At the same time, non-price factors such as product diversification, regulatory compliance and market access remain equally important determinants of export performance.

Workers’ remittances continue to provide Pakistan’s strongest external buffer. During July-May FY26, inflows reached approximately $38.1bn, more than 9pc higher than a year earlier, with monthly receipts consistently exceeding $4bn in recent months.

These inflows have financed a significant portion of the trade deficit, supported foreign exchange reserves and reinforced confidence in the rupee. However, heavy reliance on remittances from Gulf economies also leaves Pakistan exposed to shifts in regional labour markets, oil prices and geopolitical developments.

Looking ahead, the FY27 policy framework envisages only gradual depreciation of the rupee, with the Ministry of Finance projecting an average exchange rate of around Rs290 per US dollar. Such an adjustment broadly reflects inflation differentials and the need to preserve external competitiveness rather than expectations of abrupt currency weakness.

The government is also seeking to diversify external financing through sovereign Eurobonds, Panda bonds, innovative rupee-denominated instruments with dollar settlement and continued bilateral support.

The principal risks to exchange-rate stability therefore remain familiar. A widening trade deficit, weaker export growth, delays in external financing or setbacks in IMF programme implementation could all renew pressure on the rupee. Conversely, sustained fiscal discipline, stronger export performance and continued foreign exchange inflows would gradually strengthen the foundations of stability.

Pakistan’s relatively stable exchange rate during FY26 marks a notable improvement over the volatility of recent years. Yet stability remains managed rather than fully self-sustaining. The central policy question is therefore not whether the rupee has remained stable, but whether that stability can endure once exceptional external support begins to recede.

Published in Dawn, The Business and Finance Weekly, July 6th, 2026