CEU Electronic Theses and Dissertations, 2019
| Author | Karim, Jawad |
|---|---|
| Title | In Search of the S-curve: Is Currency Devaluation a Justifiable Economic Policy Tool to Improve Pakistan's Chronic Trade Imbalance? |
| Summary | In October 2018, the newly-elected government of Pakistan formally reached out to the International Monetary Fund for financial assistance to avoid the impending balance of payment crisis. As a precondition to receiving the ‘bailout’ package, the Fund has urged the country to switch to the free-float exchange rate regime and let the market forces of demand and supply determine the true value of the Pakistani rupee. Consequently, the State Bank of Pakistan (SBP) has withdrawn its support for the rupee and allowed to depreciate the country’s currency in a bid to comply with the preconditions of the IMF and also to rein in the burgeoning trade account deficit that has been spiraling out of control. Although, theoretically speaking, depreciation or devaluation would lead to an improvement in the trade balance, the decision has received mixed responses. On the one hand, the decision has been hailed as it would contain the imbalance in the external account and put the country on a higher growth trajectory, on the other hand, the effectiveness of the devaluation has been questioned as it would have limited impact on correcting the country’s trade imbalance while having negative repercussion on the country’s economy. This thesis is an attempt to empirically evaluate the effects of the currency devaluation on the imports and exports of Pakistan. Analyzing the exchange rate movement between 2004 and 2017, this study investigates the existence of S-curve in Pakistan’s trade relationship with its six major trading partners. Cross-correlational method is employed to determine whether currency devaluation is a prudent monetary policy to improve the country’s trade balance. Results demonstrate that the S-curve is evident in only half of the trade relationships of Pakistan mainly because of the country’s import dependency on capital goods and raw materials for domestic manufacturing production, low export competitiveness, and slowdown in global economic growth. The study concludes the government and the central bank of Pakistan should be careful employing foreign experience while designing domestic exchange rate policy as the country’s economic dynamics are distinctive. |
| Supervisor | Lajos Bokros |
| Department | School of Public Policy MA |
| Full text | https://www.etd.ceu.edu/2019/karim_jawad.pdf |
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