How Monetary Policy Pulled Pakistan Back from the Brink

Monetary policy is often the first line of defense in an economic crisis. It shapes inflation control, currency stability, and overall economic growth. Without effective monetary interventions, economies risk spiraling into inflationary chaos, financial instability, and prolonged recessions.
Pakistan’s recent economic crisis highlighted the crucial role of monetary policy. In 2023, the country faced severe economic headwinds—foreign exchange reserves fell below $3 billion, inflation hit 38%, and the rupee plunged to 307/USD. Global interest rates remained high, limiting access to external financing, and concerns over default loomed large.

The Monetary Response

To counter the crisis, the State Bank of Pakistan (SBP) implemented a series of targeted interventions:

• Interest Rate Hikes: The policy rate was raised to 22% to curb inflation and control speculative activity in the forex market.
• Exchange Rate Adjustments: Greater exchange rate flexibility, a crackdown on illicit forex trade, and improved dollar inflows helped stabilize the rupee from 307/USD (Sept 2023) to 278/USD (2025).
• Liquidity Management: SBP used short-term instruments like buyback auctions, PIBs, and T-bills to manage market liquidity and prevent excessive rupee volatility. Pakistan’s First-Ever MTB Buyback (Sep-2024): The government accepted Rs. 351 billion in bids to reduce short-term debt, improve liquidity, and lower borrowing costs. Expansion to Long-Term Securities: SBP has also announced plan to extend buyback auctions to PIBs, absorbing excess liquidity to support debt sustainability.
• Reserve Accumulation & FX Market Interventions: With USD/PKR stabilizing, SBP purchased $3.8 billion (July–Oct 2024) to strengthen reserves. By October 2024, reserves surpassed $11 billion for the first time in over 30 months, supported by IMF inflows, remittances, and export growth. This helped expand import cover and strengthen external buffers.
• IMF-backed Fiscal Reforms: Coordination between monetary and fiscal policy, alongside IMF’s $3 billion Stand-By Arrangement, helped rebuild reserves and restore investor confidence.
• Market Confidence Measures: Improved reserves, steady remittance inflows, and declining inflation signaled economic stabilization, boosting confidence in Pakistan’s financial markets.

Without these measures, Pakistan would likely have faced severe capital flight, a balance of payments crisis, and prolonged economic distress.

Lessons from Emerging Markets

Pakistan is not alone in facing such economic challenges. Other emerging economies have implemented aggressive monetary measures to stabilize their economies:

• Brazil (2024-2025) – Raised the SELIC rate from 12.25% to 13.25% to control inflation and support its currency.
• Turkey (2023-2024) – Hiked rates from 8.5% to over 40%, later easing them as inflation came under control.
• Egypt (2024) – Adopted a 600bps rate hike and a flexible exchange rate, leading to sharp devaluation but restored investor confidence.
• India (2025) – Cut rates for the first time in five years to stimulate economic growth and ease borrowing costs.

Each of these economies highlights a common lesson: decisive monetary action, backed by fiscal reforms, is critical in stabilizing financial markets.

The Road Ahead

With inflation moderating and reserves improving, Pakistan now faces a new challenge—balancing stability with growth. Key policy priorities should include:

• Gradual rate easing to encourage private sector lending and investment.
• Strengthening external reserves through exports, foreign investments, and remittance inflows.
• Structural economic reforms to reduce dependency on IMF bailouts and create a self-sustaining economy.

Pakistan’s experience highlights a vital truth: monetary policy alone cannot fix deep-rooted economic issues. While it acts as a stabilizer, long-term economic resilience depends on governance, structural reforms, and a clear policy direction.

Final Thoughts

As global monetary trends shift, Pakistan must remain adaptable and proactive. The lessons from 2023 should serve as a blueprint for future economic planning, ensuring that monetary and fiscal policies work in tandem for sustainable growth.

What steps do you think Pakistan should take next to maintain stability and drive economic growth?