In a notable departure from the International Monetary Fund’s (IMF) forecast, the government has decided to prepare its upcoming 2024-25 budget based on an exchange rate of Rs295 to the US dollar.
The finance ministry has issued an official directive setting the average exchange rate at Rs295 per dollar for the next fiscal year’s budget calculations, The Express Tribune reported while quoting sources.
Such an assumption represents a depreciation of only 3.5% or Rs10 per dollar, in contrast to the IMF’s projection of nearly a 16% fall in the value of the local currency.
The Rs295 rate would be used to estimate the costs of foreign debt repayments, services, and imports, including defence-related procurements. It merits here to mention that it is an average rate, implying the year-end exchange rate in June 2025 could be higher.
In comparison, the IMF’s latest report released in May had assumed a rupee-dollar parity of Rs328.4, a significantly weaker projection than the government’s.
The IMF’s exchange rate assumptions have not always aligned with the actual market conditions. For instance, the Fund had anticipated the rupee to trade at Rs300 per dollar for the current fiscal year, but the actual average rate has been Rs285.
The planning ministry has also acknowledged that the exchange rate and foreign exchange reserves are likely to remain under pressure in the next fiscal year due to scheduled external debt repayments.
The government’s projections for foreign loan disbursements from multilateral and bilateral creditors, excluding any IMF borrowings, sovereign bonds, or foreign commercial loans, are around $6 billion for the upcoming fiscal year.
In addition to its divergent exchange rate assumptions, the government is pinning high hopes on significant disbursements from the World Bank and Asian Development Bank to help stabilise the rupee in the upcoming fiscal year.
The government is anticipating around $2.5 billion in disbursements from the World Bank and another $1.6 to $1.8 billion from the Asian Development Bank. such inflows, combined with the possibility of a new agreement with the IMF, could help alleviate pressure on the local currency.
The government’s notified exchange rate of Rs295 per US dollar is crucial for determining key budget allocations, such as the defence budget, foreign debt servicing, the cost of running Pakistan’s diplomatic missions abroad, and the Public Sector Development Programme. For the next fiscal year, the government has estimated around $1.7 billion in inflows for federal project financing.
Any fluctuations in the dollar value or underestimation at the time of budgeting could render the entire budget unrealistic, leading to cost overruns and the need for supplementary grants. In the outgoing fiscal year, the government had set the rupee-dollar parity at Rs290, but the actual average rate ended up at Rs285.
Interestingly, the current interbank rate for the rupee stands at around Rs279 per dollar.
The IMF, in its recent staff-level report, has stressed the need for a flexible exchange rate to cushion against shocks and rebuild foreign exchange reserves. The Fund has also recommended that monetary policy remain tight to bring inflation to more moderate levels and remain agile to proactively respond to any signs of resurgent inflation.
The IMF’s assumption of a weaker rupee at Rs328.4 per dollar could imply that inflation may not fall to single digits in the next fiscal year.
Pakistan is seeking another IMF programme to improve its economy. The Fund has linked the signing of the new staff-level agreement for the next programme with the approval of Pakistan’s new budget in line with the IMF’s desired parameters and the prior approval of the IMF executive board for the staff-level deal.
Based on the indicative rupee-dollar parity, sources said that interest payments on external debt are projected to reach around Rs1.1 trillion for the next fiscal year.
The IMF has projected that Pakistan’s total interest payments on its debt will reach a record Rs9.8 trillion in the next fiscal year, significantly higher than the finance ministry’s estimate of around Rs9 trillion.
According to the IMF’s assessment, interest payments on domestic debt are expected to be in the range of Rs8.5 trillion while interest on external debt is projected at Rs1.15 trillion.
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The rupee-dollar exchange rate also has significant implications for the defence budget. The defence ministry has requested a budget of Rs2.27 trillion while the finance ministry has indicated a figure of Rs2.1 trillion thus far. The exchange rate value will impact the allocation for the Armed Forces Development Programme.
Finance Minister Mohammad Aurangzeb plans to unveil the annual budget on June 10, but the date remains uncertain due to the prime minister’s upcoming visit to China and a delay in holding the National Economic Council meeting.
The Cabinet Division has not yet constituted the NEC, and as a result, its meeting may now be held upon the prime minister’s return from Beijing. The NEC meeting is crucial, as it must approve the national development outlays for the federal and provincial governments and launch the Economic Survey of Pakistan.
If Pakistan meets the IMF’s condition on the agreed fiscal framework, including the necessary taxation measures, a staff-level agreement with the IMF could be reached as early as July. A timely IMF deal would help alleviate pressure on the local currency.
