Discussion on Exchange rate of Pakistan for the period 1990 to 2010
This paper will elaborate on the exchange rate changes and currency fluctuations of Pakistan, which is the sixth largest country in terms of population and also the 7th nuclear power. The researcher will present an economic analysis on exchange rate disparity of Pakistani Rupee (PKR) with US Dollar during the era of 1990 – 2010. For this purpose, the information and statistics available on FDI, import and export figures, external debt, foreign reserves of US Dollar, inflow of remittances and impact of economic sanctions due to nuclear explosions will be analyzed in detail to study the strengths and weaknesses of Pakistani currency in international financial market. The paper will also demonstrate the repercussions of PKR appreciation and depreciation on future of Pakistani economy and its sustainability.
The table below highlights that exchange rate of Pakistani Rupee in 1990 was Rs. 21.7 for one US Dollar, which increased to Rs. 53.7 in 2000 i.e. the Pakistani currency depreciated by almost 100% within a decade using the base price of 1990. The currency depreciation took place at an increasing rate throughout 1990 – 2000; however, the decline in value was higher during 1996 – 2000 (from Rs 35 to 53.7) because Pakistan not only faced political crisis but also conducted atomic explosions in 1998 that sent shockwaves to economy and foreign trade until 2000. A major reason behind increasing rupee – dollar disparity was high current account deficit during 1990s as the entire decade was plagued with political uncertainty that crippled industrial growth (SBP Pakistan 102-105).
Source: http://www.tradingeconomics.com/pakistan/official-exchange-rate-lcu-per-us-dollar-period-average-wb-data.html
The declining trend in Pakistani rupee also continued during 2000 – 2010 as well when rupee touched the level of Rs. 85.2 in 2010 against US Dollar, which means a depreciation of almost 57% using the exchange rate of 2000 as base. The graph below shows that PKR remained mostly stable at a rate of Rs. 60 during 2001 – 2007 despite increase in trade deficit. The foreign direct investment (FDI) and remittances to Pakistan increased during 2001 – 2007 due to favorable business friendly policies and higher growth rates of the nation. Hence, the current account deficit reduced substantially due to dollar inflows and reasonable level of foreign reserves were available for international payments. Another major reason behind economic and currency stability was the higher inflow of US dollars in the name of coalition support fund and aid from international donors to minimize negative impact of war against terror in Afghanistan (neighboring country) on Pakistani economy. The then government was an active ally of US and NATO coalition forces as it offered strategic military support and use of local destinations to conduct effective strikes against militant groups across Afghanistan (HEC Pakistan 58-65).
Graph 1 – Exchange Rate Pakistan 1990 - 2010
Source: http://www.tradingeconomics.com/pakistan/official-exchange-rate-lcu-per-us-dollar-period-average-wb-data.html
However, the situation once again became troublesome for Pakistan that recorded sharp increase in dollar value from 2008 onwards due to depleting foreign reserves and adverse impact on economy amid global recession during 2008 – 2010 that affected exports. Money laundering also became an issue that was curbed through changes in SBP regulations and actions (Qazi). All in all, there are severe repercussions of currency devaluation for Pakistani economy such as balance of payment crises, expensive imports and oil bills, higher inflation, discount rate changes to curb inflation, issues pertaining external debt servicing and finally reduction in local and foreign investor confidence.
References
HEC Pakistan. Exchange Rate and Pakistan Economy: A Historical Review. Higher Education Commission, Chap. 4 (2009): 57-73. Web. November 30, 2014
Qazi, M. S. Multiple Variables Affecting Rupee Stability. Business & Finance Review, Feb. 2011: Web. November 30, 2014
SBP Pakistan. Impact Analysis of Financial Reforms. State Bank Pakistan, Chap. 6 (2001): 101-126. Web. November 30, 2014
