Journal Review:

Impact of Exchange Rate on Balance of

Payment: An Investigation from Pakistan
Ahmad, N., Ahmed, R., Khoso, I., Palwishah, R., & Raza, U. (2014)

Slides Presentation Prepared by:

Syazwani Khalid 3190030
 Table of Contents
01 02
Introduction Objectives
• Objectives of the study
• Background of study • Hyphotheses
• Problem Statement • Literature review

03 04
Analysis Conclusion
• Data of the study • Recommendations
• The models • Limitation of the study
• Methodology • Conclusion
• Findings
 01
Introduction
Background of study
Problem Statement
 Exchange Rate
● “Exchange Rate between two currencies is the rate at which one currency will be
exchanged for another.”

● Exchange rates have important impact on the profits of international

administration. The modifying in exchanges rate also manipulate the worth of
overseas investments apprehended by entity investors.

● The events underline the importance of the exchange rate on the financial
stability of each country and their pathways to global commodity and service
exchanges.

● If the Pakistan exchange rate is Rupees 100 to $1 (Rupees 100/$), subsequently

it gets 100 Rupees to buy a dollar or a dollar's cost of goods and services.

● From the opposite perspective, a dollar buys 100 Rupees, used to pay for
Pakistani goods and services.
 Balance of Payment
● Balance of Payment it records and summarizes international financial transaction for a
specific period.

● It primarily encircle of three accounts; current account, capital account and reserve
account.

● It also tells us how many goods and services the country has been exporting and
importing and whether the country has been borrowing from or lending money to the
rest of the world.

● The balance of payments was proposed to measure a nation's capacity to reach its
assurance to exchange its currency for other currency or for gold at fixed exchange
rates.

● To meet this assurance, country supported a load of Federal Reserve as gold or other
currencies forms that they could use to help their currency.

● A decrease in this stock was viewed as a significant balance of payments deficiency

because it undermined the capability of the nation to reach its obligation.
Developments in the exchange rate contain expansive influences further
investment aspects, for example, interest rate, inflation rate,
unemployment, money supply, and so forth.

Exchange rate value is derived from a combination of the results

structure with two different states to produce a global exchange by
correlating the traded goods.

While Exchange rate impacts on the volume of trade and export,

exchange rate pushes an influential impact on a nation’s balance of
payment position.
 Why analyze the country’s Balance
of payment (BOP) ?

BOP provides comprehensive information on the national

currency's supply and demand.

Financial information in BOP might be used to evaluate the

nation's performance in global budget competition.
 Study Objectives
The purpose of the study is to determine the impact of exchange rate on
Balance of Payment, through investigation of Pakistan Economy.

Figure out the reasons, what Is there a significant impact of How can we maintain the
influences exchange rate. EXRT on BOP? exchange rate?
 The intention to compile the study is, to ascertain the
vulnerability & volatility of exchange rates & its tendency
on BOP conditions and contradiction between them in all the
adverse and favorable conditions.

The Problem Statement

 Hyphotesis

01 02

H0: H0:

Exchange rate lags have no BOP lags have no impact on BOP

impact on balance of payment.
02
Objectives
Objectives of the study
Hypotheses
Literature review
 Literature Review
Author & Year Objectives Findings Recommendation
Oladipupo & Ogheneovo Study the impact of exchange rate • They exposed to EXRT had an enormous impact on the BOP It was suggested that proper
(2011) to the appearance of distribution situation. overseeing hardwearing system be
Impact of Exchange Rate on the BOP • The exchange rate devaluation preserve essentially guide to set up to make sure sensible utilize
Balance of Payment in situation utilizing the (OLS) enhanced balance of payment situation if economical control of credit and accessible overseas
Nigeria system drives. exchange.

Cooper (1978) Study the effect of exchange rate • He conclude that the deflation prompts eminence exports and
Flexible Exchange Rate and depreciation on the BOP of brings down imports.
Stabilization Policy several increasing nations • The long run might enhance on BOP situation of a nation.

Onyinye (2012) To study the Effect of Exchange • Found that exchange rate has a significant impact on the balance • They recommend that
The Effect of Exchange Rate Rate on the Nigerian Balance of of payments position. appropriate monitoring
on the Nigerian Balance of Payment. • The exchange rate depreciation can actually lead to improved machineries be set up to ensure
Payment balance of payments position if fiscal discipline is imposed. judicious use of credit and
• They also found out that improper allocation and misuse of available foreign exchange.
domestic credit, fiscal indiscipline, and lack of appropriate • Exchange rate policies have to
expenditure control policies due to centralization of power in be used along with the fiscal and
government are some of the causes of persistent balance of monetary instruments to get
payments deficits in Nigeria. meaningful results.

Ghei and Kiguel (1993) Examine the effect of maxi- • The exchange rate influences BOP.
devaluation in low-inflation • Its outcome indicates to the store position of the declining state
Devaluation in low inflation countries on the real exchange enhances as effect of degrading.
economies. rate, inflation, and growth. • This implies that depreciation enhances the balance of payments,
because a modifying on the store place comprises a modifying on
the balance of payments place.

Obaseki (1991) Examined foreign exchange • The major findings of the paper include the inability of The exchange rate for the ,Naira
Foreign Exchange management in Nigeria during the exchange control measures adopted before the should be determined within a band
Management in Nigeria: past, period prior to and since the commencement of SAP to tum around the external sector to ensure stability while still relying
present and future. introduction of the Structural on market forces.
of the economy, especially since 1982 when Nigeria
Adjustment Programme (SAP)
started to experience serious foreign exchange problems
 Type of Exchange Rate System

Floating Exchange Rate System Flexible Exchange Rate System Fixed Exchange Rate System

• System of floating exchange rate • According to Jhingan (1997) • According to Anyanwu (1993)
consistent with progressions in the exchange rate move immediately to fixed exchange rates system is not
demand and supply of foreign exchanges. supply and demand.
• BOP alteration dominatingly through essentially self-equilibrating for
• It doesn't permit a deficiency or occurrence the coexistence of
EXRT and interest rate modify, the surplus to advance and dispenses export blockages and dependence
nonexistence of universal resources of with the issue of shortage of of un strategized parts such as
gold and foreign exchange. it necessitate surplus of any one currency. energy impressive contribute to a
more great exchange rate unsteadiness • It also evades the necessity to circumstances in which the
than under a fixed rate structure in which instigate change in prices and modification procedure is
official mediation hoses the level of income to support or restore incapable to eradicate persistent
exchange rate disparity. (Onyinye,2012) equilibrium in a critical balance of payment deficits at existing
payment. Jhingan (1997) exchange rates.
 Exchange system in Pakistan

01 02 03

1947 1971 1982

Breton Wood System Smithsonian Agreement Jamaica Agreement
Pakistan pegged Pakistan rupee Pakistan regulated floating
to the British Pound Sterling exchange rate system
Pakistan start to pegged Pakistan
Rupee with USD
Rs 13.3507/GBP Rs12.84/USD
(equivalent to Rs 3.31/USD)
Rs4.7697/USD
 Exchange system in Pakistan

04 05

1998 1999
Dual Exchange rate Mechanism Floating Rate
During emergency in Pakistan, the governments Pakistan is practice market-based
restructure exchange rate structure:
floating exchange rate regime
1. Fixed exchange rate at PKR 46/USD
2. Floating rate determined through demand
and supply of foreign exchange in the
interbank market.

Rs 46.24/USD
03
Analysis
Data, Methodology & Findings
 Source of Data
Official website of State Bank of
Pakistan

Type of Data
Secondary type and time series data

Frequency of Data
Monthly basis.
seven year time period ;
January 2007- October 2013
 Model & Variables
ARDL – Auto To figure out the relationship between the dependent and independent
variables and their respective lags.
Regressive
Distributed Lag
model

Independent Variable : Exchange rate (EXRT)

Variables Dependent Variable : Balance of Payment (BOP)
 Methodology
Autoregressive Distributed
Granger Causality
Lag Model (ARDL)
Tests
Figure out the relationship To get a clear understanding of
between the dependent and whether Exchange rate impact
independent variables and their BOP or BOP has an impact on
respective lags. Exchange rate,
granger causality test was
conducted.
 Analysis
● ● Since the p-value () < 0.05 thus we
 
reject null concluding that EXRT
Cause BOP.

● Whereas on the other hand, the p-

value () >0.05 , cannot reject and
therefore satisfying our study.

 
 Limitition of the Study

All the studies ultimately

In this study they put
refer some sort of outcomes
their energetic
in different perspective or
fulfillment as required
angles, however it cannot be
until the finishing
taken as the absolute
point, however they
statement, because material
cannot obviously
and method are always been
claim this as qualified
welcome for criticism and
or constraint free, but
precision, thus to ensure the
as an unbiased &
transparency and relevancy
enthusiastic effort
 Recommendations

01 03

02
The integration of financial sector work
Management should address how would be an important element. A key
to bring better focus to the role over the structure should be to
analytical work on exchange Management should clarify
prioritize exchange rate policy issues
rates. and initiatives from across the IMF,
responsibility and accountability for
including multiyear agenda for policy,
exchange rate policy issues and activity
research and statistical work.
use as a forum like that surveillance
committee to ensure proper focus on
key issues, and to discuss a variety of
different views and perspectives.
 Conclusions
● Stability of exchange rates may create a positive environment for encouraging the
investment, and this can improves balance of payment.

● As per study findings, it has been established that exchange rate and balance of
payment has a vital correlation to each other.

● It must be perceive that how can be an effective exchange rate policy.

● We used autoregressive distributed lags (ARDL) model to estimate the connection

between these two variables, the consequence show the significant and positive
relationship.

● It has seen that exchange rate lags is statistically significant and has a positive effect on
BOP, accordingly result we accept the hypothesis that present is significant correlation
between EXRT and BOP.
 Thanks
[email protected]
+60 18367 2009

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