The State Bank of Pakistan’s (SBP’s) foreign exchange reserves have dropped by nearly a billion dollars in just eight weeks, from December 13 to February 7. This decline occurred despite the current account posting a surplus of half a billion dollars in December, with expectations of a modest surplus for January.

The implication is alarming: financial account payments — primarily government foreign debt servicing — are being routed through the current account, pushing the overall balance of payments into negative territory for January 2025.

This marks a concerning start to the new calendar year. The financial account, which includes foreign loans and investments, is drying up. If this trend continues, the SBP may be forced to sustain a current account surplus using limited tools: allowing the Pakistani rupee (PKR) to depreciate further and keeping interest rates relatively high. Should reserve depletion accelerate, import restrictions may resurface as a desperate measure.

The federal government’s narrative of economic stability and remarkable recovery over the past year rings hollow to foreign lenders and investors. The financial account........

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