Economists advocate long-term, economy-first policy

Country may find it difficult to attract investors in absence of balance between security, trade

KARACHI:

The rupee has put together its calmest multi-year stretch since the mid-2010s. Experts who credit that stabilisation now want the state to shift from short-term, defence-centric management to long-term, economy-first policy, a milestone that has remained elusive for decades.

Calendar 2024 delivered a rare full-year rupee appreciation of 1.8%. Year 2025 was almost flat, up 0.9%. Through July 2026, the rate sat at Rs277.50 to a dollar; still inside a tight 277-284 band. That band is the story. The rupee that now looks stable is more than double its end-2017 print of about Rs109. The rupee can buy 84 times less dollar than it did in 1947. What has changed is not the long decline. It is the pause.

Growth Securities Head of Research Nasheed Malik recalls the turn to the months when default talk was open and official reserves were not. "Pakistan was quite close to default, and foreign exchange reserves were quite low," he said. "State Bank reserves fell below $4 billion, and import cover dropped to one month, and below that at one point."

In September 2023, the monthly average reached about Rs297, the high in the long official series. Intraday, Malik said, the currency touched 320. "Since late 2023, it has come down to 278."

The total liquid reserves are back above $20 billion, where the SBP holdings were $17.10 billion in the week ended August 21, with the country's stock at $22.59 billion. Fiscal and external accounts have stayed contained. The interbank-open market gap has been compressed. Informal exchange companies have been squeezed, remittances pushed onto formal rails, and the central bank has been a persistent buyer of dollars. "Stability should continue as long as global conditions and the macro picture do not worsen," Malik said.

The other side of that calm is the Real Effective Exchange Rate. SBP data put REER at 107.9 in July against 106.3 in June, an eight-year high and above the 10-year average of 102.44. The central bank says 100 is not equilibrium. Markets still read the rising REER as one driving weaker export competitiveness and cheaper imports.

IBA Assistant Professor Aadil Nakhoda said the rupee was becoming more overvalued against several trading partners on that basis. Inflows make it easier to defend the spot rate inside an IMF programme than outside it. "The nominal rate is being protected even though fundamentals suggest depreciation," he said. "An appreciated currency can be a problem when the programme ends. This time FX is managed well because we are in the IMF facility. The issue starts when we are out of it."

Arif Habib Commodities CEO Ahsan Mehanti put the overvaluation at about 7.9%. Prolonged strength, he said, costs exporters even as it supports confidence and remittances.

An industry official said export base could grow but not without a long-term industrial policy. "They have never seen one in this country. Every new bureaucrat who comes to the helm prepares a new policy."

Three things are a must to achieve growth. First, space. People who know business, tax administration and industrial organisation have to be allowed to run those files. Security and programme compliance are not a substitute for a factory plan. They are the floor. They become the ceiling when every commercial decision waits for clearance.

Second, a balance between security and trade. Industrialists say the country cannot attract capital if investors read a permanent defence situation. Recent defence achievements are real. But the pictures send the signal of a constant defence-like situation. Global capital is used to security that does not have to be displayed at every gate.

Third, homemade rules. Several economists argue that one reason the tax-to-GDP ratio will not rise is that the statutes were drafted to look like a western advanced system. Islamabad kept reaching for models built for a different firm structure, a different enforcement capacity and a different political bargain with traders and growers. The result is a code that looks modern and still misses the base.