In a bold move, Pakistan has decided to disregard the International Monetary Fund (IMF)’s forecast of a 16% depreciation of its currency for the next fiscal year, opting instead to prepare the upcoming budget with an exchange rate of Rs295 to the dollar. This decision was confirmed by the Ministry of Finance through an official memorandum, marking a significant deviation from the IMF’s assumptions.
The Ministry of Finance has set the exchange rate at Rs295 to a dollar for the fiscal year 2024-25 budget. This rate represents a modest 3.5% depreciation, or Rs10 per dollar, in contrast to the IMF’s projected 16% depreciation. It is important to note that Rs295 to a dollar is not a target rate; rather, it will be used to calculate the costs associated with foreign debt repayments, services, and government imports, including defense procurements. This rate serves as an average, suggesting that the year-end rate in June 2025 might be higher.
The IMF, in its report released in May, assumed the value of the rupee would be Rs328.4 to a dollar, indicating a nearly 16% depreciation from this year’s average price of Rs285 per dollar. Historically, the IMF’s assumptions about the exchange rate have not always aligned with reality. For instance, the IMF had assessed the rupee-dollar parity at Rs300 for this June, which was off by 5%.
The Ministry of Planning has highlighted 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 expects realistic foreign loan disbursements from multilateral and bilateral creditors to be around $6 billion for the next fiscal year. This excludes any borrowings from the IMF, sovereign bonds, and foreign commercial loans.
The government is particularly hopeful about receiving approximately $2.5 billion from the World Bank and another $1.6 to $1.8 billion from the Asian Development Bank. Additionally, there is an expectation that a new agreement with the IMF could help alleviate pressure on the rupee.
The exchange rate set by the government is crucial for determining various budget components, including the defense budget, foreign debt servicing, the cost of running Pakistan’s missions abroad, and the Public Sector Development Programme (PSDP). For the next fiscal year, the government has estimated around $1.7 billion in inflows for federal project financing.
Any significant fluctuations in the dollar value or underestimation during budgeting can render the entire budget unrealistic, leading to cost overruns and the need for supplementary grants. Last fiscal year, the government had set the rupee-dollar parity at Rs290 to a dollar for budget purposes, but the average rate ended up being Rs285.
The IMF’s staff-level report emphasized the necessity of a flexible exchange rate to buffer economic shocks and rebuild reserves. It also advocated for a tight monetary policy to moderate inflation and respond proactively if inflation re-emerges. The IMF’s assumption about the exchange rate implies that inflation may not fall to single digits in the next fiscal year.
Pakistan is currently grappling with a severe shortage of foreign currency and is seeking another IMF program. The IMF has linked the signing of a new staff-level agreement to the approval of Pakistan’s new budget, which must align with the Fund’s expectations and receive prior approval from the IMF executive board.
Based on the indicative rupee-dollar parity, interest payments on external debt are projected to reach around Rs1.1 trillion for the next fiscal year. The IMF has projected total interest payments on debt to be a record Rs9.8 trillion, significantly higher than the finance ministry’s estimate of around Rs9 trillion. This includes Rs8.5 trillion for domestic debt and Rs1.15 trillion for external debt.
The rupee-dollar parity also has significant implications for the defense budget. The Ministry of Defence has requested a budget of Rs2.27 trillion, while the finance ministry has indicated Rs2.1 trillion thus far. The exchange rate will impact the defense budget allocation, particularly the Armed Forces Development Programme.
Finance Minister Mohammad Aurangzeb plans to unveil the new budget on June 10th, although this date remains uncertain due to the Prime Minister’s visit to China and delays in holding the National Economic Council (NEC) meeting. The Cabinet Division has not yet constituted the NEC, so its meeting may be held after the Prime Minister returns from Beijing.
Before announcing the budget, the government must convene the NEC meeting to approve national development outlays for the federal and provincial governments and launch the Economic Survey of Pakistan. Meeting the IMF condition on the agreed fiscal framework, including taxation measures, could lead to a staff-level agreement with the IMF in July. A timely IMF deal will help alleviate pressure on the local currency.
