Pakistan's balance-of-payments near-default and the rupee's collapse

Pakistan entered fiscal year 2022-23 already strained by a $17.4 billion current account deficit the previous year, and the shock compounded when catastrophic monsoon flooding in August 2022 destroyed crops and infrastructure just as global energy and food prices surged after Russia's invasion of Ukraine. By February 2023 the State Bank of Pakistan's own foreign reserves had fallen to barely two weeks of import cover, pushing the country to the edge of sovereign default and forcing a steep devaluation of the rupee against the dollar within months. The central bank responded by letting the exchange rate move more freely, removing informal caps that had been suppressing the currency in the interbank market, and raising its policy rate to 22% to rein in inflation that reached 37.97% in May 2023, the highest ever recorded. A nine-month, $3 billion IMF Stand-By Arrangement approved in July 2023 released an immediate $1.2 billion tranche, stabilizing reserves enough to avert default, though at the cost of a sharp recession in large-scale manufacturing and a severe squeeze on household purchasing power.