Govt sets Rs290/$ exchange rate
The federal government has set the Rs290 to a dollar exchange rate for the new budget, which shows a nominal depreciation of 3.5% in the next fiscal year and indicates its comfort in meeting external debt repayment obligations.
The exchange rate has been determined for the purpose of calculating disbursements and repayments of foreign loans and grants, as Pakistan officially follows a 'flexible exchange rate policy'.
The finance ministry has issued an office memorandum to all concerned ministries and divisions, asking them to consider this rate for budget allocations for the fiscal year 2026-27. The government has now announced June 10 as the date for the budget speech, subject to final endorsement by Prime Minister Shehbaz Sharif.
The Rs290-to-a-dollar average exchange rate indicates Rs10 or 3.5% depreciation over this year, which is not in line with currency market trading in the past year. The rupee has been gradually strengthening over the past couple of years, lately one paisa per day, against the greenback.
The Rs290 rate will also be used for determining the defence budget portion related to foreign procurements and foreign debt servicing. The International Monetary Fund ( IMF) has projected the defence budget at Rs2.66 trillion. But there is a possibility that the government may make higher allocation due to hostilities at international borders, according to government sources.
The exchange rate is also the benchmark for allocating budgets to Pakistan's missions abroad and the Public Sector Development Programme (PSDP).
For the next fiscal year, the federal and four provincial governments have planned to take $3.2 billion or Rs927 billion worth of foreign loans for project financing. This is equal to 22% of the total national development budget of Rs4.3 trillion and indicates significant reliance on foreign creditors.
The federal government has indicated Rs267 billion in foreign project loans, while the four provinces have projected Rs660 billion in foreign loans.
The current budget had also been prepared on the assumption of Rs290 to a dollar, but the rupee largely remained stable. The government has now decided to make the revised budget estimates of the outgoing fiscal year based on Rs280 to a dollar, said the sources. On Thursday, the inter-bank rate for the rupee stood at Rs278.42 to a dollar – an appreciation of three paisa.
For the next financial year, the IMF has assessed Pakistan's gross external financing requirements at $21.2 billion and for the year after at $30 billion.
Sources said PM Sharif took a meeting this week to see whether the external financing requirements were adequately reflected and whether the government would be in a comfortable position to arrange $30 billion in fiscal year 2027-28.
The sources said the finance ministry assured the prime minister's office that the country's external financing needs are fully covered and the $30 billion requirements for 2027-28 were mere projections by the IMF.
For the next fiscal year 2026-27, the government has projected a current account deficit of around 0.7% of GDP or $3.6 billion. Exporters recently urged the prime minister to liberalise the rupee further, according to sources.
For the next fiscal year, interest payments on external debt are projected to reach approximately Rs1.1 trillion or nearly $4 billion. Overall, the government may allocate around Rs7.8 trillion for debt servicing.
Pakistan's external debt largely remained under control this fiscal year after the central bank resorted to buying dollars from the local market. The SBP has bought $27 billion since 2023, according to central bank governor Jameel Ahmad.
In its recent staff level report, the IMF has emphasised that exchange rate flexibility should be the main shock absorber for Pakistan, particularly given the need to continue rebuilding reserves. The lender said efforts to deepen the foreign exchange market should continue, including through a carefully sequenced medium-term foreign exchange market liberalisation.
"While the SBP's proactive approach to reserve accumulation has helped increase foreign exchange buffers, reserve cover remains too low by standard reserve metrics, and certainly inadequate to support any specific exchange rate," according to the report.
It added that with the economy now facing the largest external shock since 2022-23, exchange rate flexibility remains the first line of defence should exchange pressures emerge, to allow the interbank market to balance supply and demand efficiently.
There is also a view that if the central bank does not buy dollars from the market, the rupee could further appreciate to around Rs260.