PAKISTAN’S total foreign exchange reserves rose to $16.04 billion by the end of January 2025 from $13.99bn in June 2024, according to the State Bank of Pakistan (SBP). This means that during the first seven months of this fiscal year, $2.05bn has been added to the reserves. However, the $11.42bn held by the SBP is still insufficient to cover three months of import bills.

The remaining reserves, around $4.63bn, belong to commercial banks.

The build-up in reserves became possible as the country continued borrowing from the International Monetary Fund and got its foreign debts owed to China, the United Arab Emirates, and Saudi Arabia rolled over. Last week, Saudi Arabia agreed to provide an estimated $1.2bn worth of oil on deferred payments.

Annualised consumer inflation in January sank to 2.4pc — the lowest reading in a decade — from 4.1pc in December and 12.6pc in June 2024, before the start of the new fiscal year in July. The central bank could potentially go for further interest rate easing now. It has already cut its key lending rate from 22pc in May 2024 to 12pc towards the end of January this year in six consecutive monetary easing moves since July. A full percentage point cut seems in order when the monetary policy review is due in March.

This fiscal year could help the government keep its cost of domestic debt servicing low and reduce its need for borrowing from banks to fill in budgetary gaps

Furthermore, we’ve seen a gradual yet consistent fall in inflation so far. This fiscal year could help the government keep its cost of domestic debt servicing low and reduce its need for borrowing from banks to fill in budgetary gaps in the short run.

Already, the government’s borrowings for budgetary support from the banking system have turned negative, the SBP data covering the period from July 1, 2024, to January 24, 2025, reveals. And, topping up the pile of domestic debts with declining amounts of additional debt is also good for the economy in the long run, provided the trend is sustained.

Negative government borrowings from the banking system — along with the infamous 15pc incremental advance-to-deposit ratio tax — have enabled banks to lend aggressively to industries and businesses. In a little less than seven months of this fiscal year, banks’ net lending to the private sector exceeded Rs0.96 trillion against only Rs0.23tr in the same period of the last year. The question now is how soon aggressive lending to the private sector can lift domestic demand and boost economic growth, creating jobs and raising household income levels.

Well, signs of this happening may not occur before the start of the new fiscal year in July. Inflation readings of 4.1pc in December 2024, followed by 2.4pc in January 2025, signal that the revival of aggregate demand remains further than was earlier anticipated. If future readings suggest that inflation has bottomed out at its present level and if it begins inching up from February, that could be a sign of a gradual pickup in aggregate demand to be followed surely by an increase in industrial outputs.

Economic growth prospects of Pakistan remain muddy despite some recent gains because of political uncertainty at home and around the world. This uncertainty has become stronger and more complex following the beginning of Donald Trump’s second term in the White House on January 20.

As expected, Mr Trump has kick-started a tariff war with arch-rival China, and the world doesn’t know when the animosity between the two largest economies will end.

The majority of Pakistanis also don’t know when exactly the current hybrid regime will create some space for the main opposition party, PTI, and its imprisoned leader, Imran Khan, and when PTI will return to normal politics, opting out of confrontations and agitations that damage the economy.

Political uncertainties are an additional reason for foreign investors to withdraw investment from our treasury bills and bonds, which grow less attractive due to falling returns amidst monetary easing. Foreign direct investment is not growing at a pace fast enough to make a significant impact on the balance of payments, either.

Exports are growing, but so are imports. And the trade deficit is expanding. Despite impressive growth in terms of percentage, remittances cannot help much in keeping the balance of payments in shape, though they can fix the issue of growing trade deficit.

Published in Dawn, The Business and Finance Weekly, February 10th, 2025