Exchange Rate and External Competitiveness: A Case of Pakistan

Abstract

This paper highlights some important points regarding exchange rate and external competitiveness of Pakistan . Firstly, overvalued exchange rate of Pakistani Rupee [PKR] has affected adversely to already weaker external competitiveness of the country . Secondly, claims of failure of depreciation in boosting performance of tradable sector are based on mixing the partial adjustment of PKR towards its equilibrium value during periods of overvaluation with undervaluation - a situation where currency is below its equilibrium value. Thirdly, the gains from depreciation of real exchange rate, during periods of adjustment, were neutralized by loose monetary policy. Fourthly, the State Bank of Pakistan [SBP] needs to develop a tool to assess and monitor the misalignment in PKR so that a better informed and prudent exchange rate policy might be formulated.