Pakistan's exchange rate volatility...

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.