Abstract:
In this article it is argued that Pakistan has had a consistently overvalued
exchange rate and the policy with regards to management of the exchange rate has
undergone a significant change in recent years. We show that prior to March 2013,
the policy target of the exchange management was stability of the real effective
exchange rate. However, during the tenure of the current government, the policy
target for exchange rate management seems to have been stability of the nominal
exchange rate against the US dollar. As the currencies of Pakistan’s major trading
partners (UK, Europe and China) have depreciated against the dollar during this
period, the real effective exchange rate has appreciated by over 20 percent since the
time that the current policy makers took office. Overvaluation in general and the
recent reversal in the exchange rate management policy in particular have had an
adverse impact on exports and the manufacturing sector. This not only has serious
negative consequences for the long term, growth of the economy, but has greatly
increased the short-term risk of a balance of payments crisis.
