Pakistan's exchange rate volatility.../Arshad Ahmed Saeed
Download as DOCX, PDF0 likes2,191 views
The document analyzes the 20-year exchange rate trend of the Pakistani rupee from 1994 to 2013. It finds that the rupee depreciated over 700% against the US dollar over this period, continuously losing value. The exchange rate rose from 1994 to 2001, then declined until mid-2007 before dramatically increasing thereafter due to rising oil prices and political instability. This collapse of the rupee led to a 59.5 billion rupee increase in external debt due to unfavorable exchange rate movements since 2007-2008. A $6.6 billion IMF loan provides some relief but will increase costs for the private sector through higher interest rates required by IMF conditions.
Pakistan's exchange rate volatility.../Arshad Ahmed Saeed
- 1. 20 YEAR EXCHANGE RATE TREND OF PAKISTAN By: Arshad Ahmed Saeed Submitted to: Ms. Saima Shafique DEPARTMENT OF ECONOMICS FACULTY OF MANAGEMENT SCIENCES National University of Modern Languages Islamabad December, 2014
- 2. Trend for the exchange rate of Pakistan for the last 20 years (1994-2013) 1. Introduction: Exchange rate is a rate at which one currency is expressed in term of another currency. It is the most important policy variables in an open economy because it affects the macroeconomic variables like trade, capital flows, FDI, inflation, int. Reserves, GDP and remittances, etc. Increasing exchange rate brings competitive advantage in international trade when it increases domestic export goods become cheaper relative to other countries so there is increase in the international demand of exports and a decrease in imports. It also affects the foreign direct investment and remittances all of these factors at the end affect the GDP. Due to change in the prices of imports and exports there is chance of change in the inflation in the economy. Changing exchange rate can affect domestic prices by direct and indirect channels. Under the direct channel a fall in exchange rate may increase the prices of imports. Under the indirect channel depreciation of exchange rate make the domestic products cheaper, demand for exports rise and induce in the domestic price level subject to limited surplus for exports. So nominal wages contracts are fixed in the short run so real wage decline. When the real wages approaches to their original level over time the production cost increase and over all price level will increase.
- 3. For the reasons, exchange rate is the most watched analyzed and manipulated economic measure by governments. We also want to see the trend for the exchange rate of Pakistan for last 20 years and try to analyze that: 1.1 Exchange Rate data of Pakistan: S.No. YEAR EX.RATE 1 1994 30.5666 2 1995 31.6427 3 1996 36.0787 4 1997 41.1115 5 1998 45.0467 6 1999 49.5007 7 2000 53.6482 8 2001 61.9272 9 2002 59.7238 10 2003 57.7520 11 2004 58.2579 12 2005 59.5145 13 2006 60.2713 14 2007 60.7385 15 2008 70.4080 16 2009 81.7129 17 2010 85.1938 18 2011 86.3434 19 2012 93.3952 20 2013 101.6289
- 4. Table1. Exchange rate trend of Pakistan 1.2 Trend interpretation Exchange rate of Pak Rupee against US Dollar has depreciated more than 700% under the managed float exchange rate arrangement in Pakistan from 1994 to 2013. This means Pakistan Rupee is continuously losing its value against Dollar. This situation is almost true for the behavior of Pakistani Rupee against other worldwide used foreign currencies. Exchange rate between Pakistani Rupee and US Dollar was 30.5666 on January 1994 and 101.6289 in December 2013. Exchange rate has shown the tendency to rise from 1994 to 2001 and started declining in late 2001till mid 2007. From the Upper given chart of Pakistan’s exchange rate, we can see that between 2001 to 2007 the exchange rate remained almost same or there is little 0 20 40 60 80 100 120 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EXCHANGE RATE Series 1
- 5. increasing trend but with the start of rise in oil prices and lawyers movement in Pakistan there is dramatically increasing trend from 2007 to onward, so the rupee totally collapsed (depreciated). Because of this depreciation on average 66% of the total increase in external debt by unfavorable movement of exchange rate since 2007-08.the depreciation of one rupee per dollar increase the debt by 59.5 billion Rupees. PolicyImplications: Pakistan badly needs fresh foreign money for boosting foreign exchange reserves and to ease down the pressure on Pakistani rupee. To avoid a full blown crises and a collapse of the currency the assistance of 6.6 billion dollar loan from IMF is a ray of hope but the cost of the private sector, because in order to fulfill the conditions set by the IMF, the government will hiked the interest rates.