The global economy is facing a “perfect storm” due to a commodities super-cycle and rising interest rates in the US and EU, leading to capital flight from emerging economies like Zambia, Sri Lanka, Suriname, and Lebanon. Pakistan, however, has managed to avoid default through fiscal adjustments and import limitations, improving market confidence as evidenced by reduced yields on sovereign bonds and a strengthening rupee.
Despite recent improvements, Pakistan still faces significant external funding needs estimated at $35 billion to $40 billion annually. The demand for dollars exceeds supply, putting pressure on the rupee and necessitating alternative dollar-funding sources to maintain economic stability.
The State Bank of Pakistan’s initiatives like the Roshan Digital Account (RDA) and Naya Pakistan Certificates (NPC) have been crucial in attracting external finance, but inflows have slowed due to unfavorable global economic conditions and static NPC profit rates despite rising global interest rates.
To address the high currency in circulation and its inflationary impact, efforts should focus on reducing government financing needs through fiscal discipline and encouraging foreign currency deposits by offering competitive returns, similar to practices in other countries like India. This approach aims to bolster the economy’s dollar inflows and stabilize the financial market.