Key takeaways
- The policy rate fell from 22% to 11% from mid-2024, reviving credit.
- Mid-July 2025 fuel hikes and a rupee near Rs285 per dollar push up import costs.
- Petroleum levies raised Rs1.16 trillion in FY24, making fuel both revenue and inflation risk.
- Record remittances of US$38.3 billion helped reserves reach US$14.5 billion.
- The State Bank should pause cuts and drain excess liquidity; fiscal policy should not add fuel.
In this Dawn column (July 2025), Dr. Ghulam Mohey-ud-din examines the trade-off facing Pakistan after a year of aggressive monetary easing: supporting recovery without reigniting inflation.
The argument
The State Bank of Pakistan cut its policy rate from 22 percent to 11 percent from mid-2024, and credit has revived. Headline inflation fell as low as 0.3 percent in April 2025 before rising to 3.5 percent in May. The column argues that several forces are now converging to push prices back up.
Fuel is the first. In mid-July 2025 petrol rose by Rs5.36 and diesel by Rs11.37 a litre, feeding directly into transport and food costs. Fuel is also a fiscal pillar: petroleum levies raised Rs1.16 trillion in FY24 against a Rs1.47 trillion target for FY25, with around Rs98 a litre collected in taxes. The currency is the second. The rupee moved from about Rs230 to above Rs280 per dollar over two years, and with roughly 80 percent of fuel imported, depreciation turns into imported inflation.
Liquidity is the third. Large open-market injections in June and July 2025 added rupees just as demand recovered. Record remittances of US$38.3 billion in FY25, up 26.6 percent, and US$8 billion of central bank dollar purchases lifted gross reserves to US$14.5 billion, a 39-month high, but did not stop the rupee from weakening.
What needs to change
- The State Bank should pause further cuts, and be ready to raise rates if inflation accelerates.
- Open-market operations should withdraw excess liquidity by selling government securities.
- Government spending should be moderated and petroleum levies held or reduced, not raised.
- Unavoidable price increases should be phased in, with a clear public commitment to the 5–7 percent inflation target for FY26.