Exchange rate reforms of Pakistan 1982

Exchange rate reforms in Pakistan 1982

Presented byNimra Waseem

Air Universityislamabad

Macroeconomics

Introduction

The topic deals with the exchange rate reforms in 1982.

I will talk about the extreme exchange rate fluctuations of years around 1982 and its reasons.

Historical background Decision making process Implementation The context of the policy Assessment / Conclusion

Historical Background

Balance of payment crises, 1979Government faced many serious issues • Private industry was demoralized• Heavy public commitments limited the govt.

ability to reorient public expenditures to words new higher commitments

• Availability of foreign exchange was restricted by poor

a. Export performanceb. Declining terms of tradec. Falling net aid inflow

Pressure of Devaluation

• Pakistan signed an agreement in 1980 with IMF t0 promote exports

• Pakistani rupee appreciated

• 1978-80 exports grew by 25%

• The deficit reached US Dollar 1.1 billion (6.2% of GDP)

• Monthly oil import bill increased from 35 million $ in 1978-79 to 73 million $ in 1979-80

• In 1980 Pakistan borrowed 1268 million $ from IMF.

Decision Making Process

Options Export subsidies• Pakistan has used export rebates to promote exports and it was 7.8 to 12.5 % range

Devaluation• Was politically undesirable and it was difficult to decide

how far to devaluate because $ was appreciating and continuous devaluation would be seen as failure of govt. policy.

Delinking• This offered flexibility in managing the exchange rate, the

value of rupee could be adjusted slowly avoiding political and economic consequences of a sharp devaluation

Implementation

MethodsThree indicators were used A basket consisting of currencies of Pakistan's

14 important trading partners Another basket consisting of currencies of 32

major countries to which Pakistan was exporting Exchange rate of rupee relative to export

competing countries.The linked basket of currencies was never

made public

Exchange Rate Policy• The initial objective was to bring the real

effective value of Pakistani rupee down to where it was in early 8Os

• In consultation with the IMF , it was decided to maintain the real effective rate below that at the time of delinking.

• The policy in 1983 was to keep the real exchange rate against the basket of currencies of 14 important countries

• By the end of 1984 rupee appreciated by 6% in terms of real trade

• When the $ started falling in 1985 the exchange rate policy was changed

• Which resulted decline in Pakistani rupee

The Wider Policy Context

Successful Demand Management

• Between 1982 to 1986 rupee depreciated by 42.77% against $.

• Annual inflation during this period was only 7%.

• In 1985-86 GDP growth was up to 16.8% and it was growing rapidly.

• International prices of number of items declined during this period.

• Trade deficit of about us $ 3 Billion enhanced availabilities in the economy.

• It was calculated that the net rise in govt. expenditures would be 1000 RS for the depreciation of 1 rupee against 1$

• At that time government expenditures increased from 14.4% in 1981-82 to 18.5% in 1985-86.

Price and subsidies• The regulated prices of imported products

provided a buffer between the exchange rate depreciation and prices faced by domestic consumers.

• Initially government managed to finance its additional features through its innovative saving schemes and bonds issue.

• In the result the budgetary pressure rose as the rupee continued to depreciate

Trade and Payments• The prime objective of delinking decision

was to maintain export growth by preventing erosion of international competitiveness

Assessment/ conclusion

When the Pakistani rupee was delinked questions about managed float weaknesses and inconvertibility

of Pakistani rupee was in concern along with instability of international currency market.• By 5 years later it was accepted that the decision

to delink the currency was essential for the good performance of the economy in general and the balance of payment in particular.

Internal factors• The problem of exchange rate appreciation.• Since the decision was taken in the absence

of immediate balance of payment crises so it did not have to accompanied by the emergency deflationary measures

• The economy continue to grow strongly and the negative income and distributional effect were avoided

External Factors• Oil prices collapsed in 1985• Pressure on budget and the balance of

payment was also reduced by the dramatic fall in the international prices of edible oil.

• In 1985 us $ began to sharp decline against other international currencies

• Maintenance of the exchange rate close to its equilibrium level was beneficial.

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