Pakistan uses a market-based exchange rate system where the value of its currency fluctuates according to supply and demand but is not completely determined by the market. There are several factors that influence Pakistan's exchange rate including GDP, terms of trade, trade openness, interest rates, and money supply. A devaluation makes a country's exports cheaper and imports more expensive, which can boost the economy but also increase costs for domestic industries and inflation. Currency fluctuations are driven by changes in demand which are impacted by transaction levels, interest rates, and speculative behavior.
4. INTRODUCTION
Exchange Rate Regime:
An exchange rate regime is how a nation manages its currency in foreign
exchange market and is closely related to the country's monetary policy.
Types of Exchange Regimes:
Ø Fixed Exchange
Ø Floating Exchange
Ø Pegged Float Exchange
5. Currency system-maintain
a currency value that
is constant against a
specific currency or good.
central bank maintain
reserves of foreign
currencies and gold.
Country's government decides
the worth of its currency :
ü Fixed weight of an asset
ü Another currency.
Most famous fixed rate is
the gold standard.
1. Fixed Exchange:
6. Best possible
exchange rate
regime-
automatically
adjust to economic
circumstances.
Dampens the impact
of shocks and foreign
business cycles.
Reduces the possibility
of having a balance of
payment crisis..
Floating currency:
Currency used in
floating exchange
rate system.
Example: Dollar
System in which currency’s value is allowed to
fluctuate according to the foreign exchange
market
2. Floating Exchange:
7. Currencies are pegged
to some band or
value, which is either
fixed or periodically
adjusted
Hybrid of fixed and
floating regimes
There are three
types of pegged float
exchange listed
below.
● Crawling bands
● Crawling pegs
● Pegged with horizontal
bands
3. Pegged Float Exchange:
8. Exchange Rate:
Value of a nation's currency in terms of the currency of another nation
or economic zone.
Pakistan Exchange Rate System:
Pakistan's policy is a “market based exchange rate system” that follows
supply and demand, but that will not be left completely to the market
14. Current Account Deficit
❑ Indicates Imports are greater than exports
❑ Not always detrimental to a nation's economy-external debt may
be used to finance lucrative investments.
❑ Emerging countries often run surpluses whereas
developed countries tend to run deficit.
20. DETERMINANTS
Gross Domestic
Product (GDP)
Terms of Trade Trade openness Interest Rate Money Supply
DETERMINANTS OF EXCHANGE RATE
Determinants- the important factors to dictate the changes in the pattern of
official exchange rate of Pakistan.
21. GDP-the basic size
of the country's
economy. It is the
representation of the
dollar value of goods
and services that have
been produced within
that country
The terms of
trade is related to
current accounts
and the balance of
payments. and is
directly proportional
to the currency
value of a country.
Trade
Openness is the
sum of imports
and exports
normalized by
GDP
Higher interest
rates tend to
attract foreign
investment, which is
likely to increase the
demand for a
country's currency.
2. Effect of Determinants:
Money supply
and exchange
rate are inversely
proportional to
each other
22. Domestic
industry
Marginal
cost
channel
Markup
channel
Firm’s
Market
share
Impact Of Exchange rate on Domestic Industry:
An exchange rate shock can affect domestic prices
through two distinct channels.
➢ The first is a direct effect through the
marginal cost channel, as the exchange rate alters the
price of imported inputs.
➢ The second, more indirect effect, is
through the markup channel.
26. IMPACT OF CURRENCY DEVALUATION
Positive Impacts:
▪ May be good for economy
▪ Economic Growth
▪ Stimulation of merchandise exports
▪ Discouraging merchandise imports
▪ Improving trade
▪ Increase revenue collection and savings
▪ Stop illegal foreign exchange
27. Negative Impacts:
▪ Increase liability and foreign loans repayment.
▪ Increase the trade gap.
▪ Stop ongoing projects due to rising costs
▪ Raise industrial costs
▪ Reduce the intensity of capacity utilization.
28. MONETARY MEASURES:
DEVALUATION REVALUATION
Declining the value of our country's
currency that reduces the price of
export and increases the price of
import which therefore saves the
domestic industry.
Improve the value of our country's
currency that increases the price of
export goods and decreases the
price of imports
30. FLUCTUATIONS IN EXCHANGE RATE
Constant Fluctuation-
Exchange rate freely float
against one another.
Higher demand for a
particular currency-Value of
currency will increase
31. Increased Demand
of Currency:
• Increased Transaction
• Increased speculative
demand
Speculative Demand:
• Higher the Interest
Rate
• Higher the currency
demand
Transaction
Demand:
• Level of Business
• Employment Levels
CURRENCY DEMAND
32. Effect Of Currency Fluctuation On Economy:
Trade:
Weak currency makes the imports more expensive while stimulating the
exports by making them cheaper for the overseas customers.
Capital Flows:
Stable currency to attract capital from foreign investors.
Inflation:
Devalued currency results in "imported" inflation.
