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

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 limit ed

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.

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

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

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EXCHANGE RATE

Series 1

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.

Policy Implications:

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.