Monetary policy: the Faustian bargain

Business Recorder argues that Pakistan’s monetary framework is increasingly prioritising currency stability, even as the rupee’s real value rises and reserve cover remains limited. The State Bank of Pakistan has lifted its policy rate by 50 basis points to 12 percent, while reserves stand at $21.5 billion, enough for roughly three months of imports. The article says that this reserve level is a useful improvement but may not provide a strong buffer against future external financing pressure.

The commentary notes that the rupee has stayed close to Rs280 per dollar since late 2023, while the real effective exchange rate has reached nearly 109. It argues that real appreciation can make imports more attractive and weaken the price competitiveness of local output and exports. With inflation at 10.3 percent, core inflation at 8.4 percent and private-sector credit expanding by 14.1 percent, the article questions whether relying on interest rates and official financing while keeping the currency steady could defer necessary adjustment.