Pakistan's Monetary Expansion Erodes Export Competitiveness

Pakistan's export sector continues to underperform despite repeated currency depreciations and IMF-supported stabilization efforts. Merchandise exports have largely remained between $28-32 billion over the past four years, with a slight decline in FY2026. Excessive monetary growth has fueled inflation, raised production costs, and eroded gains from currency depreciation, shifting incentives from exports to domestic sales and consumption.

The broad money (M2) supply expanded by nearly Rs5.7 trillion in just one year, driven by fiscal financing requirements, domestic credit expansion, and strong remittance inflows that boosted bank deposits. This excessive monetary growth has led to a significant monetary overhang, with around Rs10.6 trillion remaining outside the banking system.

A substantial proportion of this cash is reportedly used in undocumented commodity trading, speculative hoarding, and informal financial arrangements involving wheat, rice, sugar, edible oil, yarn, and precious metals. Such parallel cash-based transactions weaken financial intermediation, encourage tax evasion, and reduce the effectiveness of monetary policy.