Analyzing impact of Exchange rate Volatility on Pakistani Balance of Payments: Policy Perspective

Abstract

Balance of payment of a country and its currency exchange rate with respect to other countries are interrelated. Studies so far have tested this relationship in many ways. This study focuses on real exchange rate. We have measured effect of exchange rate not only on exports of a country but on its imports as well. Moreover, impact of exchange rate on volatility of export and import has also been studied and analyzed in this research. Volatility of export/import varies differently with various exchange rates. Theoretically, with the depreciation of local currency, the volume of export must increase. However, the import getting expensive should fall. As net effect, the volume of trade should improve in favour of the country. Contrary to it, in Pakistan, studies show a delink between exchange rate fluctuation and volume of trade. (Ayub, 2009). The research shall prove that exchange rate has impact on trade balance. The major focus of the study will be on the policy perspective. If the exchange rate volatility does have effects under Pakistani scenario, the study will find out some ways to create bridge on the gaps of trade balance and exchange rate volatility.