Special Edition-07.pdf - Lahore School of Economics

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146 M. Ashraf Janjua - Availability of specific facilities at the Federal, Provincial and Local level. There is a need for improvement in the quality of imports: all those factors which are related to productivity. It is not too early to talk of a knowledge based economy – The role model is Singapore’s medium and long term issues. - The SBP should restrict its role to financial flows and price stability: there should be adequate credit facilities to make full use of the export potential. - The government should provide incentives to help maintain competitiveness. - Diversification of exports. Concentration of exports in commodities: textiles, carpets, leather products, sports goods, surgical instruments, rice etc. There is a need for diversification towards services including I.T., dairy products, cottage industry products, plants and machinery and jewelry. We must also expand inter-regional trade with India, Bangladesh, Sri Lanka, and China. With over 25% of our exports going to the U.S.A. we have become extremely vulnerable. Any sanction could spell disaster for us. VI. Concluding Remarks 1. Information about the causes of fluctuations in the real exchange rate is important for central banks, as some fluctuations may require immediate corrective actions by them while others may not require this. It is essential to know what kind of movements in the real exchange rate signal a loss in the external competitiveness of the economy. If appreciation of the real exchange rate is due to an improvement in the “fundamentals” such as an increase in the rate of productivity growth in the tradable goods sector of an economy, the central banks in this case need not take any corrective action. However, if the real exchange rate deviates significantly from its equilibrium level, also known as a “misalignment”, the competitive stance of the Pak economy would be jeopardized and require immediate “corrective action” by the SBP. 2. The real exchange rate responds to real as well as nominal (monetary) variables. At any given moment, the real exchange rate depends on economic fundamentals (e.g. tariffs, international prices,
Pakistan’s External Trade: Does Exchange Rate Misalignment Matter for Pakistan? 147 real interest rates, etc.) and aggregate macroeconomic pressures, generated by an excess supply of money or a fiscal deficit or both. 3. In order to achieve sustainable macroeconomic equilibrium, monetary and fiscal policies must be consistent with the chosen nominal exchange rate regime. Further, the misalignments in the real exchange rate can be used as a guideline for policy interventions by the SBP. 4. Pakistan’s Balance of Payments (BoP) is characterized by persistent large external financing needs with weak economic activity in the country. This has cast doubt on the possibility of exchange rate misalignment in Pakistan. 5. The CPI-based REER index suggests that the Pak. rupee has been depreciating over the period of the study. However, the rate of real depreciation of the Pak rupee was lower than the actual need which is evident by the widening of Pakistan’s trade deficit. Moreover, Pakistan’s export base remained stagnant and did show significant diversification in the last decades, which is reflected in a constant export market share and deteriorating trade balances. 6. There are some signs of external financial vulnerability and the country’s real exchange rate appears to be somewhat overvalued, a situation that could be best addressed through increased fiscal discipline. 7. The BOP statistics show that despite continued devaluation, the Current Account Deficit (CAD) in Pakistan has deteriorated. This does not necessarily mean that the exchange rate polices do not work. The exchange rate policy in Pakistan failed due to a number of factors. The most important reason is that devaluation was accompanied by poor monetary management. In particular a continued growth in money supply resulted in a high inflation rate which neutralized the favorable affects of devaluation on the real exchange rate and Pakistan could not achieve any competitive advantage from devaluation. What really matters is to improve the BOP position through adjustment in the real exchange rate. To influence the real exchange rate through devaluation, Pakistan should have adopted a tight monetary policy. Thus, except for the intervention in the foreign exchange market the State Bank of Pakistan should have held tight control on money supply.
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Special Edition ISSN 1811-5438 THE
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THE LAHORE JOURNAL OF ECONOMICS Con
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Monetary, Fiscal and Financial Sect
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The Lahore Journal of Economics Spe
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Reforming the Government in Pakista
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18 A. R. Kemal export product would
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20 A. R. Kemal three indicators, Pa
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22 A. R. Kemal Rank Score Efficienc
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24 A. R. Kemal while productivity g
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26 A. R. Kemal across the globe whi
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28 A. R. Kemal V. Conclusions Pakis
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Increasing Global Competitiveness:
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Monetary and Fiscal Policies 45 sys
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Monetary and Fiscal Policies 47 200
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Monetary and Fiscal Policies 49 (es
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Monetary and Fiscal Policies 51 The
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Monetary and Fiscal Policies 53 The
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Monetary and Fiscal Policies 55 Thi
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Monetary and Fiscal Policies 57 Whi
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Monetary and Fiscal Policies 59 exc
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Monetary and Fiscal Policies 61 mat
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Monetary and Fiscal Policies 63 Tax
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Monetary and Fiscal Policies 65 Ref
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68 Shakil Faruqi Currently, the fin
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70 Shakil Faruqi crises, or both. T
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74 Shakil Faruqi The financial stre
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76 Shakil Faruqi taking activities
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78 Shakil Faruqi In spite of attent
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80 Shakil Faruqi change of this mag
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82 Shakil Faruqi position which beg
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84 Shakil Faruqi became insolvent a
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86 Shakil Faruqi 2009, the CAR for
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88 Shakil Faruqi ratio of net inter
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90 Shakil Faruqi risk has to be man
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92 Shakil Faruqi through a few roun
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94 Shakil Faruqi Crockett, Andrew:
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96 Shakil Faruqi State Bank of Paki
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11. All references used in the text
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The Lahore School of Economics The
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