User talk:Umar Ali from UOG

Fluctuations in Exchange Rate and its impact on Economy

Fluctuation in exchange rate means Appreciation or Depreciation of home currency in relation to the foreign currency. Appreciation of currency means, to officially increase the value of home currency in relation to the foreign currency. Depreciation of currency means, to officially reduce the value of home currency in relation to the foreign currency.

Exchange Rate effect the Economy at International level: Fluctuations in the exchange rate may have a significant impact on the macroeconomic fundamentals such as inflation rate, import and export ratio, interest rate, net capital inflow etc. Factors that influence exchange rate include: Interest rate, Inflation rate, Trade balance, Political stability, Internal harmony, High degree of transparency in the conduct of leaders and administrators, General state of economy and Quality of governance.

When one country currency depreciate, it is reduce the gap of deficit external balance, because economist considers currency depreciation could actually be beneficial for the economy. Since a weaker currency will boost exports, which in turn will increase employment and this, as a result, will improve the economic growth.

Currency appreciation indicates the revival of public and foreign investor confidence in the economy and its currency. We have seen that business people have more confidence in this government. Businesses are flourishing and profitability has increased. I believe the market has incorporated these (positive) sentiments and it is reflected in the rise of the exchange rate.

Interest rate parity theory says that exchange rate move due to interest differential between domestic and foreign country. When one country gives more interest rate as compare to others it attract the foreign investors. For example Pakistan give more interest rate, it attract foreign investors and appreciate the Pakistan currency in foreign market.

Inflation is a factor by which goods of country become expensive and currency of country become depreciated. When goods of that country expensive it also reduce the exports. When one country currency appreciate in foreign market, it reduce the inflation level of that country. Due to low inflation level foreign investors are more confident for investment in that country. Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.

A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved and currency appreciated. Increasing terms of trade shows greater demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's currency. If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease in relation to its trading partners.

Foreign investors inevitably seek out stable countries with strong economic performance in which to invest their capital. A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

A depreciation of domestic currency makes the country’s exports relatively cheaper for foreigners and makes foreign goods relatively more expensive for domestic consumers. This helps to increase the country exports and switches demand towards domestically produced goods. Exchange Rate and Pakistan:

Exchange rate study that are compulsory to solve the important economic problems facing the economy of Pakistan, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. Exchange rate shows that how much unit of one nation’s currency can be purchased with one unit of domestic currency. Exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one nation’s currency, it may turn out fastest moving price of currency and bring all the foreign capital in the economy.

Exchange rate fluctuation in Pakistan can influence the decisions of policy makers and affect the volume of exports and imports. It can also affect the allocation of manufacturing of goods, reserve money, exports, imports and balance of payments.

Finance Minister of Pakistan Ishaq Dar: Recently Pakistan rupee appreciate in foreign market against US dollar. The Pakistani rupee has seen an exceptional growth against the US dollar in the last few days. The rupee-dollar parity Rs 99, Rs 98 in the interbank market which had touched over Rs 111 few months back. Everyone wants to sell their dollars now. Not many are buying. Foreign direct investment are also in favour of Pakistan rupee. According to the State Bank of Pakistan, the country received foreign direct investment of USD 523 million in the first seven months of 2013-14 and USD 106.9 million in January alone.

According to Ishaq Dar, recent appreciation of the rupee against the US dollar will have a positive impact on the prices of essential commodities. The rupee’s appreciation has boosted the confidence of domestic and international investors.

One cause for appreciate the Pakistan rupee is remarkable recovery against the greenback on the back of some strong dollar inflows including $750 million from the Pakistan Development Fund helping the rupee to appreciate above 100-to-a-dollar level.

Ishaq Dar says that one of the steps taken to decrease the dollar price is halting of the smuggling of gold to India. He said that some people imported huge amount of gold to smuggle to India because of the higher prices there. He said that decrease in the price of dollar has benefited the country for more that 700 billion rupees.

Ishaq Dar says that overall prices have gone down and the inflation rate has remained at 8.6 percent for the last 8 months. The International Monetary Fund has also recognized that prices of essential commodities have reduced in the country.

Government has implemented concrete steps to improve overall external position by ensuring substantial capital and financial inflows in the country. As a result, forex reserves of Pakistan have improved substantially in the last one month. This has been made possible by not only receiving larger inflows from multilateral and bilateral resources, but also through attracting forex flows through the capital markets and better home remittances.