Devaluation of Pak

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Devaluation Of Currency

Devaluation refers to the reduction and

depreciation in the value of currency with

respect to other monetary units.

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Causes of devaluation Exchange rates

he rate at which one nations currency can beexchanged for that of another

Rates impact and are impacted by internationaltrade in free market system to maintain a BOT

and Balance of capital

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How Exchange rates effects currency

Demand of currency

determined by

Decrease in demand of

currency causes

devaluation

By demand for

countrys export and

investment

Pak has less exports+

low investment rates

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Balance of payment

BOP provides us with important information

about whether a country is paying its way inthe international economy or not.

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IMPORTS EXPORTS

3050 m. Feb. 2011 2050 m. Feb 2011

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Cause of incomparable value of exports

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Export ofraw material Increase in

price level


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Inflation

Inflation refers to continual rise of price

level. When inflation occurs, purchasingpower of a unit of money decreases.

Inflation rate of Pakistan is 12.91 % as per

figure of Feb,2011

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Law & Order situation

Devaluationof Currency

Corruption+Exploitationof citizens

Politicalinstability

Bombexplosions

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Expansionary fiscal or monetary policies

Government. adopt policies that cause aggregate

demand to grow at a pace higher than domestic

supply. The gap filled by imports.

Previous Government resorts to borrowing from the

central bank or from foreigners. This increasedinflation.


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Weaknesses of domestic financial system

Contribute to the eruption of a crisis

Foreign capital plays an important role in

economic development

Case of the Pakistan at the time of (9/11).


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Capital flight

Foreign directive investments: if the residents of

an open economy opens up a company abroad, thisinvestment actively managed.

Foreign portfolio investment: if any resident buys

stock of foreign company.


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Variables for causing capital flight:

Real interest rate paid on foreign assets.

Real interest rate paid on domestic assets.

Perceived economic and political risk

The Government policies


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Speculative pressure

Speculation means rumors about any condition in

country. Such as political situation, according to this,

if there is a speculation that in future countrys

political condition will most worse so people

withdraw their money from banks and shift it towards

foreign countries.


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Advantages of Devaluation

Boost for domestic demand

Current account deficit

Higher rates

Inflow of money

Increase in employment Decrease demand for foreign goods

.


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Balance of payment

Equilibrium in value of currency

Increase in Investment Maintaining BOP

Industrial Growth

Economic Development

Increase the World market


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Disadvantages of devaluation

Price level increases

Retaliation

Foreign debts

Shortage of goods at home market

Inelastic exports

Increase in import bill


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Impact of devaluation

A recent positive impact on PAK economy

16% rise in earnings

Rs 23 billion in terms of Pakistani currency

21% growth

5% impact of the devaluation


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Benefits

Cotton clothshowed 22% growthin its exports

cotton yarn 2%

garments 38%

art, silk, synthetictextile 142%

textile materialsmarked 84%

Leather garments11%

while footwear and

canvas footwearshowed a negativetrend

5.18 billion dollars

compared to 4.43billion dollars in thesame period lastyear.


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Correcting the BOP

Increase in foreign earning

Import of essential items only

Minimize expenditure on invisible imports

Remedies


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Stable monetary policy

Fiscal policy

Maintaining law and order situation

Political stability leading to economic

stability

Investor friendly corporateenvironment


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Increasing Export lead growth

Promotion of labor intensive industries

Diversification of exports

Restoration of sick industries

Reduction in export duty

Creation of export agencies

Joint ventures


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Devaluation in Pakistan

In 1955 due to inelastic production structure

In 1972

In 1982 due to shift from fixed to managed float

system

In 1997

Improvement dollar stabilized from 2002 to 2006

Devaluation continued up till now


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cONCLUSION

Devaluation of Pak

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