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devaluation of currency pakistani rupees again dollar

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Abstract

The purpose of this report is to measure the effects of volatility of exchange rate movements from year 2002 to 2011. According to result our hypothesis has been supported that there is Continuous Depreciation of exchange rate in Pakistan due to the uncountable factors influencing the economy and exchange rate.

Hypothesis: Continuous Depreciation of exchange rate in Pakistan

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Acknowledgement
All praises be to Allah Almighty, the most compassionate and merciful, the most gracious and the best solution provider, without His help and blessing we were unable to complete this project. It is His blessing and kindness, which guided us through rough and tough periods. To us the blessings of Almighty and the true teachings of His Prophet Muhammad (PBUH) means to be above all. We are greatly thankful to my parents who sent us in the best academic environment, where we learnt how to cope with the best academic environment, where we learnt how to cope with the problems of real practical life under the guidance of benevolent teachers. We are extremely indebted to our beloved teacher Ms. Maria Faisal for her help and support. We are also gratified to our friends who helped us at different stages of this project. Finally we are thankful to my university for providing me the opportunity for completion of this project.

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INTRODUCTION: Exchange rates are indicative .Rates may vary depending on the type of transaction. Transactions will be effected at the best possible rate. Pakistani rupee rate was in a continuous declining trend against us dollar and other major currencies of the world for the period. Most of the analysts were pointing out the increase of exchange rate due to oil transactions .when ever PAK rupee forex rate lose its strength against us dollar rate. The other currencies also get impact of international fluctuations. The volatility of exchange rates adversely effects on export demand. The high degree of volatility and uncertainty of exchanged movements observed in Pakistan is of great concern of policy-makers and researcher to investigate the nature and extent of the impact of such movements on Pakistan’s volume of trade. Not much practical research is available to verify the exchange rate unpredictability in Pakistan particularly with reference to floating exchange rate. The objectives of this projects is to investigate the effect of exchange rate movement of Pakistan from 2002 to 2011

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Let’s have a view of the currency rates in Pakistan from 2002 to 2011. ANALYSIS OF PAKISTANI RUPEE FLUCTUATIONS FROM 2002 TO 2011 1. FOR THE YEAR 2002 MONTHS January February March April May June July August September October November December CURRENCY 60.177395 60.08988 59.999765 60.05789 60.0369 60.079905 60.070015 59.479155 59.48044 59.073515 58.571015 58.288865

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Year 2002
PKR 60.10 PKR 60.00 PKR 59.90 PKR 59.80 PKR 59.70 PKR 59.60 PKR 59.50 PKR 59.40 PKR 59.30 PKR 59.20 PKR 59.10 PKR 59.00 PKR 58.90 PKR 58.80 PKR 58.70 PKR 58.60 PKR 58.50 PKR 58.40 PKR 58.30 PKR 58.20

Analysis: In January 2002 the price of dollar was 60.00 Rs.then in February it slightly decreased to 59.80 the in march to September it decreased to 59.60 to 58.80 in October to December it further decreased 58.60 to 58.20. In December it is beneficial for our country because our currency is appreciating against dollar.

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2. FOR THE YEAR 2003: MONTHS January February March April May June July August September October November December CURRENCY 60.177395 60.08988 59.999765 60.05789 60.0369 60.079905 60.070015 59.479155 59.48044 59.073515 58.571015 58.288865

Year 2003
PKR 58.20 PKR 58.10 PKR 58.00 PKR 57.90 PKR 57.80 PKR 57.70 PKR 57.60 PKR 57.50 PKR 57.40 PKR 57.30 PKR 57.20

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Analysis: In January 2003 to may 2003 the price of Pakistani rupee was appreciating from 58.10 to 57.60.In June Pakistani currency depreciates to 57.75.in July Pakistani currency appreciates to 57.70, in august and September rupee was depreciating from 57.72 to 57.75.then in October to November the rupee was rapidly appreciating from 57.60 to 57.10.and in December Pakistani currency little bit depreciated to 57.35. 3. FOR THE YEAR 2004: MONTHS January February March April May June July August September October November December CURRENCY 57.272965 57.143595
57.296795

57.34311 57.81374 57.80952 58.242105 58.690245 58.80372 59.857985 59.604695 59.507415

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PKR 60.10 PKR 59.90 PKR 59.70 PKR 59.50 PKR 59.30 PKR 59.10 PKR 58.90 PKR 58.70 PKR 58.50 PKR 58.30 PKR 58.10 PKR 57.90 PKR 57.70 PKR 57.50 PKR 57.30 PKR 57.10

Year 2004

Analysis: In January 2004 Pakistani currency was at 57.30. And in February it increased a bit to 57.10. And in March to September it starts decreasing from 57.30 to 58.90.in October it rapidly decreased to 59.90. In November and December Pakistani currency appreciates to 59.70 to 59.50.

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4. FOR THE YEAR 2005: MONTHS January February March April May June July August September October November December CURRENCY 59.394 59.4118 59.36555 59.4301 59.58235 59.7271 59.6496 59.6614 59.7245 59.725 59.7341 59.88985

year 2005
PKR 59.90 PKR 59.80 PKR 59.70 PKR 59.60 PKR 59.50 PKR 59.40 PKR 59.30 PKR 59.20 PKR 59.10

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Analysis: In January 2005 the price of dollar was in Pakistani rupees was appreciate 0.1 than in December 2004. And then in February the rupee little bit depreciate against dollar. In March the currency was appreciated against dollar. In April, May and June Pakistani currency depreciate against dollar. In July Pakistani currency again appreciates against dollar. From September to November the Pakistani currency depreciated and then December Pakistani currency depreciates from 59.73 to 59.89. 5. FOR THE YEAR 2006: MONTHS January February March April May June July August September October November December CURRENCY 59.79885 60.00315 60.0664 60.0093 60.0133 60.2309 60.27225 60.3336 60.50065 60.7482 60.7116 61.08415

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year 2006
PKR 61.00 PKR 60.90 PKR 60.80 PKR 60.70 PKR 60.60 PKR 60.50 PKR 60.40 PKR 60.30 PKR 60.20 PKR 60.10 PKR 60.00 PKR 59.90 PKR 59.80 PKR 59.70

Analysis: In January 2006 the price of dollar in Pakistani rupees was appreciated 0.9 than in December 2005.pakistani currency was depreciate in February to march and then appreciate from April to May and then in June to October it depreciated and then it appreciated in November and in December it depreciated. 6. FOR THE YEAR 2007: MONTHS January February March April May June July August September CURRENCY 60.9111 60.8169 60.7976 60.6919 60.6604 60.773 60.46885 60.55315 60.6035

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October November December

60.6949 60.90995 61.3083

year 2007
PKR 61.40 PKR 61.20 PKR 61.00 PKR 60.80 PKR 60.60 PKR 60.40 PKR 60.20 PKR 60.00

Analysis: In January 2007 the price of dollar in Pakistani rupees appreciate 0.1 than in December 2006. The Pakistani currency was appreciate from January to May and in June it was depreciated and then in July it was appreciate and then from august till December it was depreciate. 7. FOR THE YEAR 2008: MONTHS January February March April May CURRENCY 62.115425 62.38101 62.8488 63.81376 68.48201

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June July August September October November December

67.21278 72.06232 74.49817 76.45507 79.034725 79.907325 78.63825

year 2008
PKR 79.10 PKR 78.10 PKR 77.10 PKR 76.10 PKR 75.10 PKR 74.10 PKR 73.10 PKR 72.10 PKR 71.10 PKR 70.10 PKR 69.10 PKR 68.10 PKR 67.10 PKR 66.10 PKR 65.10 PKR 64.10 PKR 63.10 PKR 62.10

Analysis: In January 2008 the price of dollar in Pakistani rupees was depreciate 0.8 than in December 2007. In January it was appreciate as compare to February. From February to May it was depreciate in June it was appreciate and from July to November it was depreciate and in December the Pakistani currency was appreciate. 8. FOR THE YEAR 2009: MONTHS CURRENCY

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January February March April May June July August September October November December

79.35452 79.041995 80.292135 80.613085 80.195315 81.08702 81.877655 82.84196 82.836885 83.260025 83.56977 83.93606

year 2009
PKR 83.50 PKR 83.00 PKR 82.50 PKR 82.00 PKR 81.50 PKR 81.00 PKR 80.50 PKR 80.00 PKR 79.50 PKR 79.00

Analysis: In January 2009 the price of dollar was 79.90 in Pakistani currency. In February it little

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bit depreciates to 79.00.in march to April the dollar was appreciated from 80.70 to 80.10.in may it appreciates to 80.20 in Pakistani currency. In June to august it was further appreciated from 81.00 to 82.90.from august to September the price of dollar was remain constant to 82.90.from October to December the price of dollar was appreciated from 83.30 to 83.60.at that time Pakistani currency was depreciated. 9. FOR THE YEAR 2010:

MONTHS January February March April May June July August September October November December

CURRENCY 84.647225 84.8705 84.033055 83.92059 84.25331 85.403025 85.59179 85.5913 85.70472 86.164145 85.542035 85.76236

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year 2010
PKR 86.50 PKR 86.00 PKR 85.50 PKR 85.00 PKR 84.50 PKR 84.00 PKR 83.50 PKR 83.00 PKR 82.50

Analysis: In January 2010 price of dollar was 84.55.in February dollar was appreciated to 84.90.in march to April dollar depreciated from 84.00 to 83.90.in may to October Pakistani currency was slightly depreciated from 84.30 to 86.20.at that time dollar appreciated. In November Pakistani currency rapidly appreciated to 85.50.and in December Pakistani currency was little bit depreciated to 85.30.

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10. FOR THE YEAR 2011:

MONTHS January February March April May June July August September October November December

CURRENCY 85.70045 85.46489 85.394025 84.38981 85.169445 85.924085 86.204315 86.91102 87.65837 87.05345 87.05748 89.578675

year 2011
PKR 89.20 PKR 88.20 PKR 87.20 PKR 86.20 PKR 85.20 PKR 84.20

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Analysis: In January 2011 the price of dollar was 85.50.in February to march Pakistani currency appreciated 85.30. At that time dollar depreciated. In April Pakistani currency further appreciated to 84.25.in may to September dollar appreciated from 85.20 to 87.50. In October to November Pakistani currency appreciated to 87.10.in December dollar appreciated to 89.25.at that time Pakistani currency depreciated. 10. FROM THE YEAR 2002-2011: YEARS 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CURRENCY 59.6175 57.688333 58.2808333 59.60794583 60.3143625 60.76579958 64.06758917 81.57553542 85.12367 86.37550167

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year 2002-2011
PKR 85.65 PKR 83.65 PKR 81.65 PKR 79.65 PKR 77.65 PKR 75.65 PKR 73.65 PKR 71.65 PKR 69.65 PKR 67.65 PKR 65.65 PKR 63.65 PKR 61.65 PKR 59.65 PKR 57.65 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Analysis: In 2002 the Pakistani currency little bit depreciate against dollar and in 2003 it was appreciated against dollar and then it start depreciate from 2003 to 2008 and from 2008 to 2009 it was depreciated with huge difference. And it was constantly depreciated till 2011.

MUSHARAF ERA: (till 2008)
The only reason the current account balance has come into positive is because of the role of remittances after 9/11.The level of remittances rose sharply due to the insecurity of nonresident Pakistanis in keeping their hard –earned money abroad. So this increases the amount f remittances entering into the country. That is why there is a steep curve in the years after 2001.On the other hand the increase in level of imports and the huge rise in the trade deficit offset this increase in remittances in the recent years. The increase in imports has mostly been due to the imports of machinery and oil for the country.

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Under what circumstances does a country devalue its currency? When a currency is devalued, it means that the market forces and the policies have made the fixed exchange rate to be returned. A country should have foreign reserves to purchase the other currency and maintain the fixed exchange rate, when a country is unable to do so it has to devalue its currency. The devaluation of the currency will make the currency cheaper as compared to other currencies. The effects of devaluation are: 1. The devaluation of a currency of any country will make its exports cheaper for the foreign countries. 2. The devaluation of currency will make the foreign items expensive for the people of domestic country, thus cutting down the imports. This may lead to more exports and less imports and reduces the current account deficit. A country may also devalue its currency to produce demand in the foreign market and thus create employment. EFFECTS OF DEVALUATION: An important hazard is that by increasing the prices of imports and stimulating greater demand for domestic products. Devaluation can intensify inflation, if this happens government may have to raise interest rates to control inflation, But at the cost of slower economic growth. Another risk of devaluation is psychological. To the degree that devaluation is viewed as a mark of economic weakness the credit worthiness of the nation may be jeopardized. Thus devaluation may dampen investor confidence in the country’s economy and harm the country’s ability to sheltered foreign investment. Another possible outcome is a round of successive devaluation. For instance, trading partner may become concerned that devaluation might negatively affect their owned to export industries. Neighboring countries might devaluate their own currencies to counterbalance the
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effects of their trading partners’ devaluation. Such “beggar thy neighbor” policies tend to aggravate economic difficulties by creating volatility in broader financial market. Since the 1930`s, various international organizations such as the international monetary fund (IMF) have been established to help nations synchronize their trade and foreign exchange policies and there by avoid successive round of devaluation. FACTORS AFFECTING THE EXCHANGE RATE: MAJOR FACTORS:The major factors that cause a country’s currency to appreciate or depreciate are:  Difference in income growth:

The nations with highest income growth are more dependent on imported goods. The high demand of imported goods will increase the demand for foreign currencies which leads to appreciation of foreign currency as compared to local currency.  Difference in inflation rate:

The people of the country with high inflation rate will demand more imported (cheaper) goods. If a country inflation rate is higher than any other country the demand for the currency of that country will decrease, which will cause the currency to depreciate.  Differences in real interest rates:

The country with higher real interest rates will attract the capital inflow of domestic and foreign investors. The demand for the currency of that country will increase and it will cause appreciation in the currency value as compared to those with lower real interest rates. This is called “hot money flows.”  Political instability:

If there is political instability in any country the foreign investor would hesitate to invest in that country and the demand of that currency would decline in global market.  Economic abundance of resources:
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The larger the resource a country owns the greater it would be able to produce and export and the demand for that currency will boost.  Demand for currencies export:

Higher export leads to higher demand and by this the currency appreciates.  Trade deficit:

When the cash outflows for imports increases then the cash inflows for exports then the country faces trade deficit. It means that imports are more than exports. When the co faces increase trade deficit then the value of currency of that country depreciate against the trading partners.  Economic money supply:

When the government adjusts their monetary policy they seek equilibrium between supply and demand for their currency. There are two ways to increase money supply either printing new notes or selling government owned securities. When each of these events take place, the currency depreciates because supply of money increases in the market.  Speculation:

When there is news that the country’s currency will appreciate in the future they will buy now at lower rates and sell in the future with higher rates. This speculative buying creates fluctuations in the exchange rate. The approach of foreign currency dealers is very important for shaping the exchange rate.  Increase in competitiveness:

If a country is more competitive because of increase labor productivity then there will be more demand for the goods and currency of that country.

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FACTORS THAT INFLUENCE PAKISTANI CURRENCY:  Current account deficit:

Pakistan is facing current account deficit because its imports are higher than exports and that results in the deficit in current account.  Difference in income growth:

Pakistani society is divided in to income groups some have very high income and other with very low income and the high class prefer imported goods that causes Pakistani currency to depreciate against trading partners.  Energy crisis:

Due to shortage of electricity and gas the productivity is being sacrificed and the result is high prices so the people are reluctant to purchase low quality high priced goods. They prefer imported goods and domino effect in the downward pressure to the economy.  Terrorism:

Due to terrorists and suicide bombing Pakistani economy is badly affected and investors are reluctant to invest in our country that is a big cause of currency devaluation.  Difference in inflation rate:

Due to crisis in Pakistan the locally made products are expensive as compared to imported goods so people prefer to buy imported goods rather than buying low quality and expensive domestic products.  Differences in real interest rates:

As the real interest is not so low but other factors such as political, economic factors are not stable so the foreigners hesitate to invest in our country.
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Political instability: Pakistan is politically very unstable governments change and the new government changes all the previous policies and there is no continuity to policies and marshal law is another major issue in Pakistan which is considered negative throughout the world. Due to which Pakistani currency is not stable and has a low value.



Economic abundance of resources:

Despite Pakistan has large number of natural resources but these are not being properly utilized and the corruption and nepotism prevails in the institutions that’s the major cause of currency devaluation.  Demand for currencies export:

Pakistan has Lower export as compared to imports which leads to low demand and by this the currency depreciates.  Trade deficit:

In Pakistan the cash outflows for imports increases then the cash inflows for exports so the country is facing trade deficit. It means that imports are more than exports. So the value of currency of Pakistan is depreciating against the trading partners.  Economic money supply

Pakistani government adjusts their monetary policy to seek equilibrium between supply and demand for currency. Government is using two ways to increase money supply printing new notes and selling government owned securities. Through these events the currency is depreciating because supply of money increases in the market.  Speculation:

The currency is depreciating continuously, so there are no or rare chances of speculation.

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Increase in competitiveness:

a country is more competitive because of increase labor productivity then there will be more demand for the goods and currency of that country but due to crisis situation and economic instability in Pakistan labor are unemployed or under employed but with a labor intensive country we are still very low productive.

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CONCLUSION: From the above discussion we conclude that when a government devalues its currency, it is often because the relation of market forces and policy decisions has made the currency’s fixed exchange rate invalid. Prolonged political uncertainty and fragile economic situation coupled with deteriorating law and order in the northern part of the country and the US threats and drone attacks in tribal areas have not only shattered the confidence of foreign investors but also forced domestic investors to pull out of the equity markets. Local investors have lost billion of rupees. We interpreted the graphical representation of exchange rate from 2002 to 2011. We analyzed the trends of the exchange rate in a whole decade, in these 10 years the Pakistani currency appreciates and depreciates against dollars. Payments for oil and other imports and foreign debt servicing remain key factors that have put pressure on the rupee. The reported manipulation by couple of banks and some leading currency players, resorting to heavy dollar buying, to create an artificial shortage and then dumping them back for quick gains, also contributed o the weakening of rupee.

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