1. Presented by
NimraWaseem
Macroeconomics

2.  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

3.  Balance of payment crises, 1979
Government 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 performance
b. Declining terms of trade
c. Falling net aid inflow

4.  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.

5. 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

6.  Methods
Three 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

7.  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

8. • 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

9.  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.

10. • 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.

11.  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

12.  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.

13.  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

14.  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.