Special Edition-07.pdf - Lahore School of Economics

Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan? 145
c) The appreciation of the actual REER due to higher price differentials
relative to the ERER would lead to exchange rate misalignment.
d) A flexible exchange rate regime responds better in case of real
shocks more than other exchange rate regimes. This suggests that
the SBP should continue with its current stance of a flexible
exchange rate regime and intervene in the interbank market only to
smooth unwarranted movements in the exchange rate by keeping in
view the ERER and exchange rate misalignment.
To strengthen the viewpoint on exchange rate policy, bi-lateral
REER and ERRER has been computed for Yen and Pound Sterling. Both the
estimates of ERRER exhibit a completely different picture. The bi-lateral
REER and ERRER and computed misalignment against both the currencies
is given in the Appendix.
IV. Where do we go from here?
1. There has to be identification of and emphasis on the indicators of
fundamental equilibrium in the medium term.
2. Policy has to be a more flexible exchange rate to maintain a
competitive position in the world market.
3. Policy measures should be identified and if needed, should be
introduced immediately to correct any actual or even potential
misalignments of the exchange rate.
V. Policies and Ground Realities
Apart from a theoretical approach there is a need for greater (and
more intensive) coordination among the stakeholders: the SBP and the
government, the latter Comprising Finance, Commence, Export Promotion
Bureau, Board of Investment and Planning Commission.
Constraining policy hurdles should be removed at the macro and
micro level:
- Export industries
- Meeting the requirements of SMEs (fisheries, no bank credit, fishers,
do not have any collateral) – the case of tiles.