The Ministry of Finance in Pakistan has instructed government departments to prepare budget estimates for the fiscal year 2023-24 using an exchange rate of Rs290 to a dollar. This exchange rate is crucial for determining various budget allocations, including the defence budget, foreign debt servicing, the cost of running Pakistan's missions abroad, and the Public Sector Development Programme (PSDP).
The decision to fix the exchange rate at Rs290 was made in an attempt to manage market expectations, as initially, the Ministry of Finance had considered using an exchange rate of Rs300 to a dollar. The accuracy of the exchange rate is important because any fluctuations in the dollar value or underestimation at the time of budgeting can render the entire budget unrealistic, leading to cost overruns and the need for supplementary grants.
For the outgoing fiscal year, the government had set the rupee-dollar parity at Rs186 to a dollar for budget purposes. However, the average rupee-dollar parity for the fiscal year 2022-23 ended up being Rs249, which was 34% higher than the Finance Ministry's initial estimate in June of the previous year.
The significant gap between the interbank rate and the open market rate for the Pakistani rupee has prompted the International Monetary Fund (IMF) to request Pakistan to share its foreign exchange policy. On Tuesday, the interbank rate for the rupee stood at Rs285.31, which was Rs27 to Rs30 per dollar lower than the open market price.
Finance Minister Ishaq Dar has stated that the Rs285 to a dollar rate does not reflect the true value of the rupee and believes that the currency is undervalued by at least 15%. He mentioned that his assessment of the rupee's real value falls between Rs240 to Rs249, a figure supported by an international report that puts it at Rs244 to a dollar.
Pakistan is currently facing a severe shortage of foreign currency, and efforts to revive the IMF program have been unsuccessful due to differences over external financing, exchange rate policy, and the demand for a fiscally responsible budget.
The inaccurate rupee-dollar parity of Rs186 for the outgoing fiscal year has led various ministries to seek supplementary grants to cover their expenses. The Ministry of Information, Ministry of Commerce, and Ministry of Foreign Affairs have already received additional funds to bridge the shortfall caused by the inaccurate exchange rate.
The Ministry of Economic Affairs has requested supplementary grants to make external debt repayments in the current fiscal year, as the allocated budget of Rs510 billion based on the Rs186 value proved insufficient. The actual cost of interest payments on external debt may exceed Rs700 billion for the outgoing fiscal year.
Based on the indicative rupee-dollar parity, sources believe interest payments on external debt are projected to reach approximately Rs1 trillion for the next fiscal year. The government aims to allocate around Rs7.5 trillion for debt servicing in the next fiscal year, which may need to be increased to align with IMF requirements.
Finance Minister Ishaq Dar plans to unveil the new budget on June 9th, and if it meets the agreed fiscal framework, a staff-level agreement with the IMF can be reached.
The Ministry of Defence has requested a budget of Rs1.92 trillion, while the finance ministry has indicated Rs1.7 trillion thus far. The Defence Ministry is also seeking the release of foreign exchange for immediate defence imports.
Prime Minister Shehbaz Sharif received budget proposals from the country's industrialists on Tuesday.
