The upcoming fiscal year, starting from July 1, is anticipated to present significant challenges for both the Ministry of Finance and the State Bank of Pakistan (SBP), potentially surpassing the difficulties faced in the current fiscal year ending on June 30. This scenario could unfold if the International Monetary Fund (IMF) delays approving a balance of payment support program or if friendly nations withhold further bilateral loans to Pakistan.
While this fiscal year witnessed relatively stable yet high interest rates and a steady rupee, the situation is poised to change in FY25. Interest rates might gradually decrease, but this adjustment will be contingent upon the central bank’s inflation targeting objectives, aimed at maintaining headline inflation within the medium-term target of five to seven percent by September 2025.
The fate of the rupee hinges on the magnitude and timing of the IMF loan, in addition to potential foreign funding from friendly countries. Despite a considerable reduction in national average headline inflation, which dropped from 17.3 percent in April to 11.8 percent in May, signaling a possible cut in the SBP’s policy rate of 22 percent, core inflation remains relatively high. This could deter the central bank from implementing substantial interest rate cuts, particularly considering pending energy price hikes and geopolitical uncertainties in the Middle East that may influence global oil prices.
The current exchange rate, hovering around Rs280 per dollar, is expected to undergo depreciation before the end of the fiscal year, as the IMF advocates for a truly market-driven exchange rate. However, projections regarding the future value of the rupee vary significantly between the Ministry of Finance and the IMF, leading to uncertainties in budget estimates and external debt servicing costs.
The central bank’s monetary policy decision on June 10, which is anticipated to include a rate reduction, may contribute to further rupee depreciation, aligning with the IMF’s call for corrective measures. Nonetheless, this adjustment comes with risks, including potential economic slowdown and increased external debt servicing costs.
Pakistan’s economic landscape is characterized by a cyclical pattern, wherein interest rate adjustments impact exchange rates, fiscal imbalances, and external borrowing requirements. Breaking free from this cycle may require comprehensive policy measures aimed at enhancing fiscal discipline, promoting private sector growth, and reducing dependency on external funding sources.
The upcoming fiscal year’s budget may provide insights into potential strategies to address these challenges and foster sustainable economic growth. However, achieving meaningful progress in breaking free from this cycle will necessitate concerted efforts from policymakers and stakeholders across various sectors of the economy.
