Factors Affecting Exchange Rate In Pakistan

Introduction

Exchange rate plays a vital role in the development of any country economy. Every country is producing goods and services. Some country produce at low cost and some produce at high cost. That’s why they sell these products in other country. Like other countries Pakistan also importing goods and services from other country. When one country sells goods or services to other country they need a medium of exchange. When one country import goods from other country it pay amount in other currency for payment they use exchange rate. Other economies exchange rates are appreciating with respect to dollar but our Pakistani rupees are depreciating with respect to dollar. Pakistan facing the energy crises due to this the cost of production

Pakistani currency is very low against the dollar due to high demand of imports. Due to deprecation of currency the price of domestic product increases and reduces the purchasing power of the people and increase the inflation in the country. Exchange rate gets affected by different economic variables. The economic variable includes trade, foreign direct investment, Capital flow, Inflation, and international reserve. The change in exchange rate brings different change in economy like if the exchange rate increase the export will increase and import will decrease. The domestic product becomes cheaper than the foreign product. When the exchange rate increases the demand of the export products increase and import products decrease. The factors which affect the most to the exchange rate are inflation. Inflation is a situation in the country when the prices of goods and services increase. The price increases in two condition and inflation has main two types first is demand pull inflation and second is increase in the cost of product that is the reason for increase in the price of product. First when price increase due to increase in demand. In this situation demand will increases

In 1947 after independence Pakistani rupees was pegged with UK pound. This link was maintained till 1971. But in 1949 UK government devalue its currency and India also followed that and also devalue its currency by putting pressure on Pakistan that Pakistan also devalue its currency. Because Pakistan was the only supplier of their raw material and also the buyer of finished goods. On that time Pakistani government take decision that it’s not devalue the currency because on that Pakistan was imported plant and machinery. Up to August 1949 the rupees dollar exchange rate was 3.31 rupees per USA dollar. Then the global recession start after the Korean War boom its effect all the economies and also Pakistani foreign reserves. In 1955 Pakistani currency devalued. The Pakistani rupee was devalued 30% and the new rate was fixed 4.76. in Sep 1971 Pakistan pegged its currency with USA dollar. The exchange rate with USA dollar was fixed 4.76 rupees per USA dollar. In 1960 Pakistan introduce a new scheme which name was export voucher scheme. Pakistan devalued its currency for promotion of that scheme. The currency was devalued 58% and the new exchange rate was fixed Rs.11 per USA dollar on 11th May 1972. In Feb 1973 Pakistani rupee appreciated by 11% because of devalued of Dollar 10%. Because the Pakistani currency was pegged with USA dollar Pakistan had revalue its currency and fixed the exchanged rate 9.90 rupees