The Glass Palace Effect – When Stability Masks Fragility

From far, the glass palace shines — elegant, orderly, magnificent. But on closer inspection you realise: it isn’t marble or steel. It’s glass. Fragile, hollow, and one crack away from collapse.

History has seen this pattern time and again — empires that looked too big to fail actually cracked from the inside.
• The Abbasid Caliphate’s decline began not with an external invasion, but with mutiny inside the palace walls. Turkish slave people (ghilman), once protectors, began assassinating caliphs to install pliant successors. Institutions were replaced by individuals.
• Or the Late Qing Dynasty. Reformers like Prince Gong and conservative power brokers under Empress Dowager Cixi constantly undermined each other — weakening their own authority. It bled through internal rivalry.
• And Rome — the empire that defined endurance — saw 26 emperors in just 49 years, most killed by their own guards. The empire split politically long before it split geographically.

The glass palace is an illusion of strength built on fragility.

It thrives on perception — the belief that the walls will hold because they always have, until people stop defending the same vision.

I call this the Glass Palace Effect — the illusion of strength built on fragility, where perception holds longer than fundamentals.

Ground Reality – Stability or Stagnation?
While we understand SBP’s desire to maintain stability rather than trigger another boom-bust cycle, the ground reality is far from encouraging. GDP growth, projected at 4.2%, has now been revised lower to slightly north of 3.5%.

And it’s showing in the streets of Saddar and Anarkali.

Tax reforms are squeezing liquidity, global demand remains weak, and the government’s fiscal space for development spending is almost exhausted. Add the impact of floods and a subdued real estate market, and liquidity looks painfully tight. Purchasing power of the common man has taken a major hit, and private investment is on indefinite pause. These are the cracks policymakers can’t afford to overlook.

In the secondary market, interest rates have stayed largely stable. The probability of a rate cut has been reduced — but not written off. Historically, Pakistan’s rate cycle has a material correlation with the Fed, and since a Fed cut is widely expected, the same logic could unfold here later this year.

FX – Stability with Strings Attached
Despite a US$500mn Eurobond repayment, Pakistan’s reserves have stayed steady — in fact, almost unchanged during the last few weeks — a sign of quiet resilience. This stability, however, isn’t by accident. SBP has been actively managing liquidity through buy–sell swaps, funding the outflow without a visible dent in reserves.

The signing of the IMF staff-level agreement has also lifted sentiment, unlocking a $1.2bn disbursement once approved by the IMF Board later this month. Pakistan’s credit profile has improved — CDS spreads are back to pre-COVID levels — giving comfort to both investors and policymakers. With these developments, the finance team is planning Panda bond issuance and a possible re-entry into the Eurobond market.

But this calm isn’t endless. Exporters have already sold a large part of their forward proceeds, which means fresh dollar supply could dry up in the near term. We’ll be replacing earned forex (exports and remittances) with borrowed forex (interest-bearing debt).

Yet, as history often shows, strong optics can sometimes hide deeper stress. The rupee may look stable, but the system around it is working overtime to keep it that way.

Why Keep the Rupee Stable?
Because a steady rupee projects calm. It gives the illusion of stability, keeps inflation in check, and helps abort capital flight. It reassures markets, investors, and even policymakers that things are under control.

But this stability is delicate — the system around it is working overtime to keep it that way. And if confidence wavers, even briefly, the reflection may crack.

Currency Trend
For now, our analysts still expect the rupee to remain stable, possibly even after December crossing. Exporters may sell forwards in the 3-month tenor without thinking twice, but beyond 3 months, they should sell selectively, basing it around robust costing.

Global Markets
• INR under pressure: The rupee hit a record low of 88.90/$ and looks poised to breach 90/$ by year-end — even if trade talks with the U.S. take a positive turn.
• Dollar weakens, gold shines: The greenback keeps slipping as traders move to safer bets like gold — though a correction could be near.
• Volatility returns: Trade tensions and Fed signals are driving sharper moves across currencies and metals.

USD/PKR
• 1 Week: 280.90
• 1 Month: 280.50
• 1 Quarter: 281.00
EUR/USD
• 1 Week: 1.1682 (Bullish)
• 1 Month: 1.1835 (Bullish)
• 1 Quarter: 1.1937 (Bullish)
GBP/USD
• 1 Week: 1.3452 (Bullish)
• 1 Month: 1.3539 (Bullish)
• 1 Quarter: 1.3667 (Bullish)
USD/JPY
• 1 Week: 149.38 (Bearish)
• 1 Month: 145.76 (Bearish)
• 1 Quarter: 144.8 (Bearish)