CONSIDER two things carefully. First, the burden on compliant taxpayers is spiralling higher and higher every year, with a marked acceleration in the preceding three years. Second, dollar-buying by the State Bank is continuing with unchecked ferocity, leaving behind little for the rest and starving private markets.
Both these phenomena are symptoms of a single problem: a state apparatus that can no longer generate the resources required for its own upkeep. In short, this relentless tightening of conditions in the economy, despite the much-vaunted stabilisation that has taken place, reflects the erosion of the underlying financial and economic viability of the state, and by extension, of Pakistan’s economy. As presently constituted.
These last three words are key, because it is equally important to remind ourselves that it does not have to be like this. But for the time being it is. And the problem is going to aggravate with time.
Just consider two stories from the week thus far. On Tuesday, a well-connected group of business leaders from Lahore and Karachi met with the army chief, Field Marshal Asim Munir, to convey their concerns about the ramped-up powers being given to the FBR, particular the powers of arrest.
“The delegation presented a comprehensive overview of the challenges faced by the industrial sector” their press release said following the meeting, “with particular emphasis on the recently enacted expansions of the Federal Board of Revenue’s powers”.
The expansion in powers refers to the powers of arrest that the FBR enjoys, which have been strengthened in the latest budget. Other things came under discussion too, but the press release suggests this was the primary reason for the visit, while the opportunity was used to also convey other concerns regarding interest rates and power tariffs.
The relentless tightening of conditions in the economy reflects the erosion of the underlying financial and economic viability of the state.
The second story, published in this paper, points to an enduring dollar shortage that has gripped financial markets in Pakistan for a number of months now and refuses to go away. And on Wednesday, a statement was released by Malik Bostan, the head of the Exchange Companies Association of Pakistan, announcing that on Tuesday he met with the ISI in which they were asked to explain why the rate of the dollar has been rising in the open market in recent days.
In his response, Bostan blamed the black market operators, saying their hand is strengthened the more the state clamps down on exchange company operations in the formal sector. Meanwhile, the shortages in the banking system persist despite rising inflows into the country in the last fiscal year.
Initially, a few months ago, we were told this shortage exists because of delays in the rollover of some Chinese debt obligation. But those rollovers were secured by the end of June, and another $1.5 billion secured through loans from two Middle Eastern commercial banks, and government sources confirmed to news reporters that their IMF-mandated target for foreign exchange reserves by end June 2025 had been met.
Then came news that remittances posted a record high (they post a record high almost every year so not a big deal really), but more importantly, the current account posted a surplus of $2.1bn whereas the IMF programme had projected a deficit of $200 million. Foreign exchange reserves held by the State Bank were projected by the Fund to be around $13.9bn by end FY25. They came in at $14.5bn instead, higher by $600m.
So, if the external sector of the economy has performed better than expected, and foreign currency reserves are even higher than what they were projected to be, why is there still a shortage of dollars in the financial markets? Why are black markets springing up, and pressures mounting in the open market to the point? One answer is that all the dollars flowing into the country from high remittances and ‘resilient exports’ are being bought up by the State Bank, leaving behind little for private players. And the open market, which is also fed by remittances and foreign currency brought in by travellers from abroad (as per their own telling anyway), is finding black market customers for foreign currency at higher price points and therefore preferring to keep a growing share of their transactions there as opposed to the regulated market, where they are compelled to sell dollars at a rate agreeable to their friends in Pindi. As a result, reserves are outperforming their projections while private market players wonder aloud where all the dollars are going. “I am surprised why the State Bank has tightened the market so severely when it has already met the IMF target,” a story published in this paper quotes a market analyst as saying.
Why indeed? The government over-performed on fiscal and external sector metrics in FY25, and they waste no opportunity to remind the rest of us of what a great achievement this is, to have stabilised the economy following the epic upheavals that wracked it post-2021. But yet here we are. The hunger for dollars continues, the hunger for revenues leaves the state famished despite having not just met but blown past some key targets in the Fund programme, and this hunger drives them to press harder and harder on financial markets and compliant taxpayers to extract more and more from them.
This is not going to end by itself. It will continue like this because the pressure for resources — fiscal and FX in this case — is not coming only from the need to meet IMF programme targets. It is in significant measure also coming from the need to rearm following the recent war with India. But in very large measure, the pressure is mounting because the failure to reform the system over the preceding years has yielded a rigid economy that cannot meet the emerging requirements of a growing economy. Until those reforms or an external bailout come, these pressures will only keep mounting.
The writer is a business and economy journalist.
Published in Dawn, July 24th, 2025