ISLAMABAD: In a significant departure from the International Monetary Fund’s (IMF) forecast, the government has opted to base its 2024-25 budget on an exchange rate of Rs295 to the US dollar.
According to sources, the finance ministry has officially directed that the average exchange rate for the next fiscal year’s budget calculations be set at Rs295 per dollar. This assumption implies a depreciation of only 3.5% or Rs10 per dollar, contrasting with the forecast of the IMF of nearly a 16% decline in the local currency’s value.
The Rs295 rate will be used to estimate the costs of foreign debt repayments, services, and imports, including defense-related procurements. It is important to note that this is an average rate, meaning the year-end exchange rate in June 2025 could be higher.
The latest report of IMF from May had assumed a rupee-dollar parity of Rs328.4, which is a much weaker forecast than the government’s.
Historically, the IMF’s exchange rate assumptions have not always matched actual market conditions. For instance, the Fund had predicted the rupee would trade at Rs300 per dollar for the current fiscal year, but the actual average rate has been Rs285.
The planning ministry has acknowledged that the exchange rate and foreign exchange reserves are likely to remain under pressure next fiscal year due to scheduled external debt repayments.
The government projects foreign loan disbursements from multilateral and bilateral creditors, excluding IMF borrowings, sovereign bonds, or foreign commercial loans, to be around $6 billion for the upcoming fiscal year.
Pakistan Hopes for World Bank and ADB Support
Besides its differing exchange rate assumptions, the government is hopeful for significant disbursements from the World Bank and Asian Development Bank to help stabilize the rupee in the coming fiscal year.
The government expects approximately $2.5 billion from the World Bank and another $1.6 to $1.8 billion from the Asian Development Bank. Such inflows, along with a potential new agreement with the IMF, could alleviate pressure on the local currency.
The government’s specified exchange rate of Rs295 per US dollar is crucial for determining key budget allocations, such as the defense budget, foreign debt servicing, costs of maintaining 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 during 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.
Currently, the interbank rate for the rupee stands at around Rs279 per dollar. The IMF, in its recent staff-level report, stressed the need for a flexible exchange rate to cushion against shocks and rebuild foreign exchange reserves. The Fund also recommended that monetary policy remain tight to moderate inflation and be agile in responding to any signs of resurgent inflation.
The IMF’s assumption of a weaker rupee at Rs328.4 per dollar suggests that inflation may not fall to single digits next fiscal year. Pakistan is seeking another IMF programme to improve its economy. The Fund has linked the new staff-level agreement for the next programme to 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 Pakistan’s total interest payments on its debt to reach a record Rs9.8 trillion next fiscal year, significantly higher than the finance ministry’s estimate of around Rs 9 trillion.
According to the IMF’s assessment, interest payments on domestic debt are expected to be around Rs8.5 trillion, while interest on external debt is projected at Rs1.15 trillion.
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