YOU have no doubt heard of ‘overheating’, the word used in economic language to describe an economy that is growing, but at the same time, seeing rising inflation. This combination of growth with inflation portends trouble because it is a sign that the economy is trying to serve levels of demand that its productive apparatus is not capable of meeting.
Over-extraction is something similar, but on the opposite end of the spectrum. This is when a state tries to extract for itself resources from an economy that the productive apparatus is not able to supply. And that is where we have reached in Pakistan. We are now in a situation where the state is trying to extract dollars and revenues from an economy in quantities that the productive apparatus cannot supply.
Consider the state’s growing appetite for dollars. One data series illuminates this. Look at the net foreign assets, or NFAs, in the State Bank’s monetary data series. This data measures the total foreign currency liquidity in the system. You’ll notice three entries. One tells you how much of the NFA is held by the State Bank. The second tells you how much is held by commercial banks. And the third entry is the total.
Notice that total NFAs are negative for a long time. Start from July 2023, when they are negative Rs1.7 trillion, and notice how the line moves in one long, slow, agonising upward trajectory, pock-marked with dips along the way, until it finally breaks into positive territory on the last day of March 2025. This long, slow, agonising climb out of negative territory is one of the two key elements of what they call ‘stabilisation’, because so long as NFAs are negative, it means the foreign currency liabilities on the system are larger than the assets.
The state is trying to extract more revenues, and more dollars from an economy that is not able to supply these.
It took years for this figure to break out above the x-axis of the graph, and the journey was marked with strong devaluation of the rupee, strangulation of imports, sharp curbs on cross-border payments, administrative measures on land border crossings, threats and cajoling for money changers and incentives for banks to rake in more remittances through formal channels. In short, it took nearly the full might of the state and central bank, for well over 20 months, to pull this line up from its low point back then to positive territory today.
Now look at the series for NFAs held by the State Bank. Notice how it breaks out above zero back in August 2024 and keeps rising from that point, suffering a few setbacks along the way in late December and early January. By June 2025, it hits a peak of Rs657 billion. Not bad considering its journey began from negative Rs883bn back in June 2023, on the eve of the stabilisation programme. That’s an increase of Rs1.5tr.
Notice how in June this figure drops suddenly back into negative territory, then leaps out of it the next week to a new peak of Rs968bn. This is a sudden outflow due to repayment of a Chinese bond, followed by an equally sudden inflow due to a rollover, so the same liquidity flows out of the system with the repayment and back in again once the rollover is finalised from the Chinese side.
Then look at what happens after that. State Bank NFAs rise massively to Rs1.45tr, and remain stable more or less at the level till today. Meanwhile, NFAs held by private banks plunge, falling from negative Rs353bn when the rollover happens to negative Rs741bn today.
Once plotted on a graph, these three lines will tell a stark story of how all the foreign exchange that flowed into the country once the current account was stabilised with great pain and sacrifice somewhere in the early months of 2023 was then bought and stashed away by the central bank in order to build its reserves. And this frenzied buying is being carried out at a price dictated by the government. The fact that NFAs of scheduled banks remain negative through all this entire period as the State Bank’s assets rise to levels not seen for years tells us that the state is basically taking all the foreign exchange flowing into the country for itself. And the data shows that this process is intensifying from May 2025 onwards.
This helps explain the rising pressures on the exchange rate in these months. It also helps explain why maybe exporters are holding back export proceeds in anticipation of a potential exchange rate devaluation. It also helps us understand why money changers were called in one more time a few weeks ago and told to stop trying to sell their dollars in the black market. It helps us understand why the State Bank is not cutting interest rates even though inflation has fallen to historic lows. It also helps explain the large spread between the price of the dollar in the interbank market versus the hundi or hawala market, which probably reflects the true price more accurately.
We hit peak stabilisation somewhere in the early months of 2025. From there, we have now moved into over-extraction mode. The state is trying to extract more revenues, and more dollars from an economy that is not able to supply these. At least not as presently constituted. So the state resorts to heightened coercive measures, which is what gives the whole enterprise the look of extraction. This is no longer the pursuit of macroeconomic stability that we are in. This is now a state bleeding its own economy to feed its appetites.
The balance-of-payments crisis that Pakistan faced in the summer of 2022 is what happens when you gun an overheating economy to grow harder and faster. The present juncture is what you get when you try to extract dollars and revenues from a stagnant economy. We have gone from overheating to over-extraction. And the only way out is to either reform, or find an external bailout.
The writer is a business and economy journalist.
Published in Dawn, September 4th, 2025
