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The federal government has decided to base the upcoming fiscal year budget on an exchange rate of Rs. 295/$, according to sources in the Finance Ministry.

This new rate marks a Rs. 10 increase from the Rs. 285/$ rate set for the current fiscal year. Although the Finance Division did not specify why the new budget is based on an exchange rate Rs. 17 higher than the latest interbank rate of Rs. 278/$, it is believed that the government aims to stabilize the market and prevent a significant exchange rate collapse in FY2024-25. The increase in the dollar rate is expected to contribute to headline inflation in the next fiscal year. However, the projected boost in foreign exchange earnings from increased demand for Pakistani products in the global market is a positive outcome, sources added.

The depreciation of the Pakistani Rupee will affect development spending on foreign currency and petroleum products, making imported goods more expensive. Consequently, the trade deficit is anticipated to decrease significantly due to reduced demand for costly imports in FY25.

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The purpose of setting the dollar rate is to estimate foreign aid, payments, and loans in rupees. This estimate appears contradictory to Finance Minister Muhammad Aurangzeb’s April 2024 statement that the PKR was stable.

Sources also noted that the market-based exchange rate will be implemented according to the agreement with the International Monetary Fund. Concerns have arisen that the higher dollar rate will lead to a dramatic increase in external debt, the import bill, and prices of imported food items in local markets. The new budget exchange rate of Rs. 295/$ may reflect the expected value of the rupee in the coming months, helping authorities to reach a staff-level agreement with the IMF on a new and larger bailout soon.

Finance Minister Aurangzeb indicated in March that an agreement on a new loan program is expected by the end of the current fiscal year (by June 30).

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