Who remembers 1998, when Pakistan’s currency market broke down?

The trigger was nuclear testing and the sudden pullback of external financing. The foreign exchange (FX) market melted, confidence evaporated, and multiple exchange rates emerged. You may call that a black swan.

But Pakistan’s FX crises did not end there. If we look at the major episodes that followed in 2008, 2018, and 2022, a clear pattern appears. What actually triggered past crises was political instability and policy paralysis, oil price spikes and inflation surges, and geopolitical shocks, along with International Monetary Fund (IMF) breakdowns.

In each case, the initial trigger came from outside the FX market. The rupee was not the cause; it became the transmission channel. Once these shocks hit, they exposed vulnerabilities that already existed, such as the elevated inflation, wide current account deficits, weak reserve buffers, slow interest rate adjustments, and, of course, the absence of credible IMF anchors.

Under the current SBP regime, the rupee remains an important optic, but reserves now anchor policy credibility

However, exposure alone did not create a crisis. What followed determined the outcome.

Sentiment — how stress became crisis

The turning point came when sentiment shifted. As confidence weakened, flows slowed, and expectations changed abruptly. The rupee’s behaviour at that stage became sentiment-driven, not valuation-driven. At that point, policy........

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