Impact of Currency Effects on Pakistan’s Economy.

Abstract

Due to population, the world has become a global village and international trade grow very fast. And due to this, the need for foreign currencies has been increased for the international transactions of goods and services as well as for stable exchange rates. In financial rent, the exchange rate (that can also be termed as Foreign Exchange rate or Forex) is the value of a foreign currency in terms of home currency. The role of the exchange rate is very important in the world's economy. The stability of the exchange rate is very important in such countries as Pakistan where the currency fluctuates frequently. There can be favorable or unfavorable consequences of the fluctuations in the exchange rate in macroeconomic variables of the economy of a country depending upon the shred relationship. However, the performance of the macro economy also influences the exchange rate fluctuations. Further, a lead-lag relationship that may exist i.e. exchange rate might be driving or slacking macro-economic variables. Another measurement is that the association may be short-run or long-run adapted to or both. The economic literature recommends the purchasing power parity dispute. The interest rate parity argument, the international fisher effect arguments amongst others linkage to the exchange rate determination and macro-economic variables. After liberation, there was no currency of Pakistan and for no less than six months Pakistan used the currency of India. Pakistan used the fixed exchange rate system up to 1st half of 1982. During the 2nd half of the same year, Pakistan stopped using fixed rates as it faced severe budgetary deficits and switched over towards a currency regime in which variations are permissible in the exchange rate inside convinced limits. In 1991, Pak Rupee started floating in the exposed market as part of the economy and monetary improvements. After that the market demand and supply were allowed in setting up the exchange rate value of the Pak Rupee against worldly trading currencies. Significant depreciation in the www Pakistani currency occurred as a result of to numerous factors including economic uncertainty, corruption, terrorism, etc. As a result of to this devaluation, the value of PKR reduced against the major currencies especially US $ since it started floating in 1991. However, there has been a constant interference from the State Bank in exchange markets of Pakistan to stabilize the exchange rate (PKR/Dollar) so the exchange rate regime. Remain managed to float rather than free-floating due to such positive interferences. These on and off interventions of central banks reflects the importance of exchange rate in the economic growth in 12 | P a g e an emerging economy like Pakistan. The current exchange rate of the Pakistani rupee to the dollar is in the range