IMF Wants Market-Based Rupee, Pakistan Says No Devaluation Needed
The IMF wants a market-based rupee and tight interest rates, but Pakistan says the rupee will stay stable.
Pakistan and the International Monetary Fund (IMF) do not agree on two big questions: how the value of the rupee should be decided, and how high interest rates should be. The difference came up this week in Islamabad, where an IMF team is holding talks with Pakistan's economic team on the next review of the country's $7 billion loan programme.
The IMF wants Pakistan to follow a market-based exchange rate and to keep monetary policy tight enough to control inflation. The government and the State Bank of Pakistan (SBP) see things differently. They told the Fund that the rupee will stay stable, that no devaluation is expected, and that the current policy rate of 11.5 percent is already high enough. According to sources, neither side has changed its position yet. The IMF's detailed reply to Pakistan's forecasts is expected in the next few days.
What the Two Sides Disagree On
A market-based exchange rate means the rupee's value is decided by the demand and supply of dollars, without the State Bank or the government holding it at a certain level. The IMF has asked for this many times over the years. In the Fund's view, a free rupee helps the economy handle outside shocks, such as a sudden rise in oil prices.
Pakistan's economic team argues the other way. Officials told the IMF that a stable rupee is one of the main reasons they expect inflation to fall. When the rupee loses value, imported goods like petrol, diesel, cooking oil and medicines become costlier very quickly. The government said the rupee stayed at around Rs278 to the dollar from July to September, which is stronger than the Rs286 the budget had assumed.
The same kind of fight has happened before. In late 2022 and early 2023, the IMF said the rupee was being held at an artificial level, and this delayed loan money for months. When the controls were removed in January 2023, the rupee fell sharply within days.
On interest rates, the State Bank told the Fund that 11.5 percent is already tight enough. The SBP raised the rate from 10.5 percent to 11.5 percent on April 27, 2026, its first increase in nearly three years, after the Middle East war pushed up oil and shipping costs. It has kept the rate the same since then. At its last meeting on September 14, seven of the ten members of the Monetary Policy Committee voted for no change.
Inflation Is Still Above 10 Percent
New figures show why inflation is at the centre of the talks. The Pakistan Bureau of Statistics said on October 1 that inflation was 10.3 percent in September, down from 11.1 percent in August. It was 9.2 percent in July. The average for the first three months of this fiscal year was 10.2 percent, compared with only 4.3 percent in the same months last year. This means the policy rate is now only about one percentage point higher than inflation.
Even so, the government told the IMF that inflation for the full fiscal year will stay between 7 and 8 percent, most likely around 7.5 percent. The official target is 8.2 percent. Officials said prices will stay high until December and then slowly ease. They gave four reasons: better crops at home, a stable rupee, an expected fall in world oil prices, and the fact that prices were already high in the same months last year.
Oil is the biggest risk. If Brent crude stays around $80 a barrel this year, officials expect inflation of 7.5 percent. If it stays near $100 a barrel until December, inflation could rise to about 8.2 percent. Because the first three months averaged above 10 percent, inflation will have to slow down a lot in the remaining nine months for the yearly average to reach 7.5 percent.
Government's Picture of Trade and Reserves
The economic team gave the IMF a positive view of the external sector, which covers trade, remittances and foreign payments. It said exports will reach about $34 billion this year, above the budget target of $32.5 billion. Higher world rice prices alone are expected to bring in at least $300 million extra.
Remittances from Pakistanis working abroad are projected at $45.5 billion, better than the yearly target. They grew by 14.7 percent in July and August. Imports are expected at $69 billion to $70 billion, in line with the target. In the first two months, crude oil imports rose by 40.5 percent, while imports of petroleum products fell by 26 percent and LNG imports fell by 28.6 percent. Officials said more local production of food and oilseed crops, such as canola and sunflower, will keep the food import bill in check.
Item | Government forecast | Budget target or assumption |
|---|---|---|
Inflation | About 7.5% (range 7% to 8%) | 8.2% |
Exports | About $34 billion | $32.5 billion |
Remittances | $45.5 billion | Below forecast (exact figure not given) |
Imports | $69 billion to $70 billion | In line with target |
Current account deficit | $2.5 billion to $3 billion | $3.6 billion |
GDP growth | 4% | 4% (first plan was 5%) |
Rupee per dollar | About Rs278 (July to September) | Rs286 |
Because of these numbers, the current account deficit is now expected at $2.5 billion to $3 billion, or about 0.5 to 0.6 percent of the economy. That is well below the target of $3.6 billion. Officials also pointed to foreign exchange reserves. The State Bank's reserves reached a record of about $21.4 billion in mid September, helped by money raised through Eurobonds. Total liquid reserves, including those held by banks, stood at $26.81 billion on September 18. In early 2023, the State Bank had less than $3 billion.
Growth Target and the Middle East War
The government also told the IMF that it will still achieve its 4 percent growth target, despite the war in the Middle East. Officials said the conflict will not hurt growth any further, because the target had already been lowered from the first plan of 5 percent. The State Bank's own forecast for growth this year is 3.5 to 4.5 percent.
Still, the government admitted there are real risks. It named higher oil prices, problems in global supply chains and fresh pressure on prices. Pakistan buys most of its oil from abroad, so any long rise in world prices hits both the import bill and the cost of living at home.
What It Means for People and What Happens Next
For ordinary people, the result of this debate matters. If the rupee is allowed to weaken, petrol, cooking oil and other imported goods could become more expensive. If interest rates go up, loans for cars, homes and businesses will cost more, although savers would earn more on bank deposits. If the government's view holds, both the rupee and interest rates may stay where they are for now. The State Bank's next monetary policy meeting is expected on October 26.
The IMF team, led by Iva Petrova, is expected to stay in Pakistan until the first week of October. The talks cover the fourth review of the 37 month Extended Fund Facility and the third review of the Resilience and Sustainability Facility, which supports climate-related reforms. The IMF is also carrying out an Article IV consultation, its regular check on a member country's economy. Other topics include tax collection, circular debt in the power sector, the Sovereign Wealth Fund and the sugar sector.
If both reviews are completed, Pakistan could receive about $1.2 billion: around $1 billion under the main loan and $200 million under the climate facility. First, the two sides must reach a staff level agreement. After that, the IMF Executive Board must approve it, and the money could come by the end of November or early December.