By Abdul Ghani

Pakistan’s foreign exchange reserves strengthened during the first half of FY26 as the State Bank of Pakistan (SBP) continued reserve accumulation amid strong remittance inflows, moderate financial-account support and relative exchange-rate stability, according to the SBP’s Half Year Report 2025-26.

The report said the SBP’s liquid foreign exchange reserves increased to $16.1 billion by the end of December 2025 compared with $14.5 billion at the close of FY25.

The reserve buildup marked a significant improvement in Pakistan’s external-sector position after years of recurring balance-of-payments stress and declining reserve adequacy.

According to the central bank, a contained current account deficit together with moderate private inflows and higher official disbursements enabled the SBP to continue accumulating reserves during H1-FY26.

The report noted that official external disbursements exceeded principal repayments during the review period, easing pressure on the country’s external financing needs.

Strong remittance inflows also played a central role in strengthening reserves. Workers’ remittances rose to $19.7 billion during H1-FY26 from $17.8 billion in the same period last year.

The SBP said favourable labour-market conditions in Gulf economies, increased labour migration and policy measures aimed at reducing remittance transaction costs helped support inflows through formal banking channels.

Exchange-rate stability further reinforced confidence in the foreign exchange market. The rupee appreciated by 1.3 percent during H1-FY26, while the gap between interbank and kerb market rates remained modest throughout the period.

The report said improved external-sector conditions helped ease imported inflation and reinforced overall macroeconomic stability.

Pakistan’s current account deficit remained contained at $1.4 billion during H1-FY26 despite a sharp widening in the trade deficit.

Imports increased 12.4 percent during the review period because of recovering domestic demand and higher industrial activity, while exports declined 5 percent mainly due to weaker rice exports and falling commodity prices.

Despite these pressures, reserves continued to accumulate as remittances and financial inflows more than offset the external trade imbalance.

The report said prudent monetary and fiscal policies also contributed to improving investor sentiment and strengthening Pakistan’s external account.

Fiscal consolidation, easing inflation and stability in financial markets reduced pressure on the exchange rate and supported confidence in the economy.

However, the SBP warned that risks to the external outlook have increased significantly following the outbreak of war in the Middle East since February 2026.

The report said higher international oil prices, supply-chain disruptions and rising freight and insurance costs could push up Pakistan’s import bill and complicate reserve management in coming months.

The central bank also warned that slower economic activity in Gulf economies could affect remittance inflows, which remain one of the largest sources of foreign exchange for Pakistan.

Between FY21 and FY25, GCC countries contributed around 55 percent of Pakistan’s total remittances, highlighting the economy’s dependence on the region.

The report projected the current account deficit for FY26 within the range of 0 to 1 percent of GDP despite emerging external risks.

Economists say the improvement in reserves is one of the clearest indicators of Pakistan’s ongoing macroeconomic stabilisation process.

Higher reserve levels improve the country’s ability to manage external debt repayments, stabilise currency markets and absorb temporary external shocks.

At the same time, market analysts cautioned that Pakistan’s reserve position remained vulnerable because the economy continued to rely heavily on remittances and external financing rather than sustained export growth.

The SBP acknowledged that structural weaknesses in exports and foreign direct investment continued to constrain long-term external sustainability.

The report stressed that maintaining adequate reserve buffers would require consistent policy discipline, export diversification and stronger investment inflows into productive sectors of the economy.

Credit: INP-WealthPk