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Article

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Why is the Pakistani currency depreciating so rapidly vis-à-vis foreign currencies? How can this trend be arrested? What is the future outlook for Pakistan’s currency? These questions must be addressed in a dispassionate manner.

Economic theory has many explanations for relative currency movements. The simplest one is that if country X records the inflation rate at 10pc per annum while country Y’s is only 2pc, the bilateral exchange rate of country X should result in depreciation of 8pc vis-à-vis country Y.

Hardly any country has economic ties with only one country. Therefore, a trade-weighted exchange rate is used where weights correspond to the relative share in trade with each country in a given basket. The US dollar dominates the multilateral basket as oil payments and other trades and services are settled in US dollars. Given that the latter is the dominant currency, the relative inflation differential between the US and Pakistan becomes a significant determinant of exchange rate movements.

Publication Source

Dawn

Publication Date

9-25-2013

Pages

1-3

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