By Moaaz Manzoor

Pakistan's exchange rate stability is increasingly being driven by stronger economic fundamentals rather than temporary administrative measures, with improvements in the country's external account, fiscal management and energy sector reducing pressure on the rupee, according to a new research report.

Insight Securities, in its report titled “The Exchange Rate Stability Conundrum,” available with Wealth Pakistan, argues that the current stability of the Pakistani rupee against the US dollar differs fundamentally from that during 2015-17, when the currency was largely supported through reserve drawdowns and external borrowing despite widening macroeconomic imbalances.

The report notes that during 2015-17, an import-led expansion, widening fiscal deficits, and an overvalued real effective exchange rate (REER) pushed the current account into a deep deficit. As external financing became insufficient to sustain those imbalances, the rupee eventually came under significant depreciation pressure.

By contrast, the report says the current episode of exchange rate stability reflects a healthier external environment. Moderation in domestic demand has contained imports, while resilient workers' remittances and growing services exports have helped keep the current account in balance, significantly reducing demand for US dollars in the interbank market. As a result, external inflows are no longer being used to finance a widening current account deficit but are largely matching debt-servicing requirements.

The report identifies fiscal discipline as another key factor underpinning currency stability. It projects Pakistan's primary balance to post a surplus of 2.5% of GDP in FY2026, marking the fourth consecutive year of primary surpluses. According to the report, tighter fiscal management has restrained aggregate demand, curbed import growth and prevented the widening of trade imbalances that characterised the 2015-17 period, when higher infrastructure spending fuelled imports and intensified pressure on the exchange rate.

"Structural changes in the energy sector have also supported Pakistan's external position by reducing dependence on imported fuels,” the report says. Increased reliance on solar, wind, nuclear energy and Thar coal has reduced dependence on imported fuels, while adjustments in Qatar LNG imports and greater utilisation of domestic gas have lowered expensive LNG imports. These changes have helped cushion the balance of payments from the recent spike in global oil prices triggered by the US-Iran conflict.

The report further notes that the stronger external position has altered the State Bank of Pakistan's role in the foreign exchange market. Instead of drawing down reserves to defend the rupee, the central bank has consistently acted as a net buyer of US dollars from the interbank market, enabling it to build foreign exchange reserves while maintaining exchange rate stability. The report's data show sustained net foreign exchange purchases by the SBP from November 2024 through March 2026.

According to Insight Securities, the convergence of a balanced external account, sustained fiscal discipline, a more diversified energy mix and continued reserve accumulation has created a stronger foundation for exchange rate stability than existed in previous periods, making the current episode materially different from that of a decade ago.

Credit: INP-WealthPk