Adeel Rahim,
Lecturer, Sarhad University of Science & IT, Peshawar. Email: adeel.ba@suit.edu.pk
Humair Khan,
Operational Manager, ABL, Peshawar. Email: k_humair@yahoo.com
Zahirullalh,
PhD Scholar, IM Sciences, Peshawar. Email: zaheer_1854@gmail.com
Yasir
Arafat, Lecturer, SUIT, Peshawar. Email: yasir.eco@suit.edu.pk
Abstract. Prior to
1976, business community of the world
followed gold as a stable standard exchange rate for international business.
After flexible exchange rate system implemented in the world in 1976, different
solutions for stabilizing the exchange rate system were introduced to reduce
the effects of exchange rate fluctuations on business. Pakistan and US Economy
relies on trade for improving its GDP, lowering inflation rate and enhancing
the economy of the Country. However if the trade balance is sufficient but the
exchange rate fluctuation is significant then GDP would decrease instead of
increasing and the economy might be negatively affected. It is understandable
that imports of Pakistan are more than its exports and if exchange rate also
fluctuates between Pakistan and the imported country then the country economy
would disturb. Due to this imbalance in import/export, Pakistan relies on
different institutions like IMF, World Bank, etc. These loans many help in
balance of payment, partial stability but on the same time depreciate the
economy if Pakistan. These loans are in the form of US dollars and Pakistani
rupees are mostly associated with US dollars. Pakistan economy suffers a
setback when these loans are returned. This paper looks as to how exchange rate
fluctuations between Pakistan and USA and affects Pakistan’s economy and what
are the factors which are disturbed due to exchange rate fluctuations between
the two countries.
Key words: Exchange rate, gross domestic product, imports,
exports
This research
will help in determining how GDP, imports, exports and inflation rate of
Pakistan is affected due to the exchange rate fluctuations between Pakistan and
USA. Similarly in case of exchange rate fluctuations what steps should be
adopted in adjusting the exchange rate fluctuations.
Since this
research basically focus on Pakistan and US exchange rate fluctuations and its
impact on different factors of economy of Pakistan. There are still different
economies in the world with whom Pakistan is interacting and these economies
also has some effects on Pakistan’s economy, but in this research data from
1990 to 2013 is considered only for Pakistan and US exchange rate fluctuations
which cover necessary cause and effect situation and economy of Pakistan is
understandable in a good environment. Due to limitation of journal pages
requirement, author could not include all the graphs and tables but necessary
one’s have been interpreted and discussed in this paper.
Bleaney,
(2000) found that inflation was mostly related to floating exchange rates and
found that they are persistent with the floating exchange rates .Furthermore,
he concluded that countries with floating exchange rates experienced high
inflation rate than those whose exchange rate is fixed.
Francisco
(2005) deduced difference between hard pegs and soft pegs and found that pegs
can reduced the inflation rate and money growth rate but have not control over
monetary discipline. Hegii (1995) explained the relationship between effects of
exchange rate on fluctuations of prices of commodity and its impact on market
dynamics.
Jing Di and
Mustafa (2010) investigated the impact of real exchange rate fluctuations on
the trade flows between the United States of America and its top 13 trading
partners.
Kandilov
(2008) explained that the exchange rate fluctuations had a great negative
impact on the agricultural trade between the countries of G 10 and when the
agricultural export subsidies were controlled then the original impact was
declined by 50% because the agricultural export subsidies were correlated with
the exchange rate fluctuations.
Khan (2012) is of the opinion that exchange
rate fluctuations could bring a substantial effect on GDP and inflation of any
country but the most important one was that of GDP as exchange rate directly
affected the economy of any country however there should be a negative impact
on the economy of Pakistan by comparing exchange rate of USA and Pakistan.
Lee (2013)
explained the affects of information regarded monetary exchange rates and its
implications on the international exchange rate scenarios. Authors suggested
that the world’s largest economies showed volatility regarded the real and
nominal exchange rates but this article showed a significant relationship
between the real and nominal exchange rate of the country.
Nishat
(2004) examined the impact of fluctuations of exchange rate and its relation
with exports of Pakistan. They concluded that fluctuations of exchange rate had
significant and insignificant impact on exports of Pakistan both in long run as
well as in the short run.
Prasad
(1997) deducted that the determinants for the real exchange rates changes were
due to the relative nominal and real demand shocks.
Peridy
(2003) explored the impact of exchange rate volatility on the exports of Great
seven (G-7) countries. He concluded that the there was a lot of variations in
the exports of G7 countries because of exchange rate volatility as it mostly
depended on which industry it covered and which exports market it focused.
Peerman and
Farrant (2006) found that exchange rate fluctuation was considered as a source
of shock for the economy of different countries and not as an absorber of shock
for different countries.
The main
methodology which is taken in to consideration is ordinary least square method
with simple regression model, Auto regressive model, cointegration test, unit
root test followed by T test, P test which are conducted for significance of
the data through accepting or rejecting null or alternate hypothesis and
analyze stationary and non stationary nature of the analyzed data.
In OLS
(ordinary least square) method simple regression model is applied. Auto
regressive model is also applied to see the long term affect of the variables
with different tests like unit root (Dickey, 1979) applied for non-stationary
of the data, cointegration test (Johenson approach)
is applied to see the degree of integration between the variables which are
stationary at level.
The research
undertaken is quantitative in nature because quantitative data allows to study
the exchange rate fluctuations more precisely and its impact on economy through
quantitative analysis would allow to the understand results drawn more
accurately. This research is fundamentally casual and hypothesis in nature.
The data for
this research is primarily taken from the official website of Federal Bureau of
Statistics of Pakistan for imports, exports, inflation and GDP of Pakistan for
about nine years from 1990 to 2013. The exchange rate data between Pakistan and
USA is taken from the official website of State bank of Pakistan from 1990 to
2013.
This
research has taken data from the official website of state bank of Pakistan and from the official website of federal bureau of
statistics of Pakistan for nine years from 1990
to 2013.
The
variables used in this research for analysis of the data are inflation,
imports, exports and gross domestic product (GDP) as dependent variable and
exchange rate as independent variable. These variables are studied separately
for finding exchange rate effects.
Figure 1 of
the research shows that exchange rate fluctuation has strong impact on
inflation, imports, exports and Gross domestic product of Pakistan which means
that with strong or weak fluctuations in exchange rate would cause inflation,
imports, exports and Gross domestic product of Pakistan to fluctuate beyond its
boundaries bringing the economy of Pakistan in good or bad position.
Inflation Imports Exports Gross Domestic
Product Strong Economy Exchange Rate
Figure 1 Theoretical
framework
Simple Regression Analysis
This model is useful to detect the effect of
independent variable on dependent variable. The slope of the line represents
the correlation between the variables. The intercept shows that when there is
no value of explanatory variable then there must be some value of explained
variable. The model is specified below
Table 1 Summary Statistics
|
Multiple R |
R Square |
Adjusted R
Square |
Standard Error |
Observations |
|
|
0.950 |
0.902 |
0.897 |
231619 |
24 |
|
Table 2 ANOVA
|
|
Df |
Sum of |
Mean |
F |
Sig. |
|
Regression |
1 |
1.1E+13 |
1.1E+13 |
201.80 |
1.5E-12 |
|
Residual |
22 |
1.2E+12 |
5.4E+10 |
||
|
Total |
23 |
1.2E+13 |
|
|
|
|
Coefficients |
Standard
Error |
t Stat |
P-value |
Lower 95% |
Upper 95% |
||||
|
Intercept |
-875137.4 |
130870.6 |
-6.69 |
0.00 |
-1146546.3 |
-603728.4 |
|||
|
exchange rate |
31625.8 |
2226.3 |
14.21 |
0.00 |
27008.73 |
36242.9 |
|||
IMP =α +β (Exc)
EXP=α
+β (Exc)
GDP=α
+β (Exc)
INF =α
+β (Exc)
Where,
IMP= imports
of Pakistan
EXP= exports
of Pakistan
GDP= gross
domestic product
INF=
inflation rate
Exc=
exchange rate between Pakistan and USA
Hypothesis
Ho = Exchange
rate fluctuation has no effect on exports, imports, GDP and inflation.
H1= Exchange
rate fluctuation has effect on exports.
H2 =
Exchange rate fluctuation has effect on imports.
H3= Exchange
rate fluctuation has effect on GDP.
H4= Exchange
rate fluctuation has effect on inflation.
After applying simple regression model in ms excel
different results were obtained for the relationship between exchange rate of
Pakistan and US and exports of Pakistan from 1990 to 2013. The regression
analysis shows positive relationship by accepting alternate hypothesis and
rejecting alternate one.
Figure 1 Exchange Rate
The graph
shows that with increase in exchange rate fluctuations exports of Pakistan are
also disturbed continuously which means that with increase in exchange rate
fluctuations the exports of Pakistan are also increased.
2. Imports
Simple
regression analysis indicates that if there is no issue of exchange rate then
Pakistan would have less import as was expected.
Figure 2 Exchange Rate
The graph
between imports and exchange rate fluctuations shows that with increased
fluctuations in exchange rate between Pakistan and US then imports are also
disturbed with same fluctuations as in case of exchange rate.
The results
obtained from simple Regression analysis explains that when there is no
exchange rate problem between Pakistan and US then GDP of Pakistan have
negative value which will result in declining of its economy.
Figure 3 Exchange Rate
The above
graph shows that exchange rate fluctuations bring variations in GDP of Pakistan
consistently making the economy of Pakistan in stable or instable state.
4. Inflation
The
regression model gives different results for inflation and exchange rate
fluctuations. The graph shows that exchange rate fluctuations does not move
inflation rate of Pakistan consistently because exchange rate is associated
with inflation rate of Pakistan in long run. If exchange rate fluctuates more
than expected then inflation rate is also disturbed in long run.
In this
study unit root test is applied for time series data in order to investigate
the non stationary or stationary nature of the data. In order to test whether
the variable is non stationary or stationary augmented dickey- Fuller test is
applied. Here in unit root test null hypothesis indicates that variable is not
stationary or got unit root while alternate hypothesis indicates that variable
is stationary. Unit root have three equations to test for stationary or non
stationary nature of variables.
The
results of unit root tests for all the dependent variables are given in table 1
which shows that except inflation all the three variables i-e exports imports
and GDP are not stationary at level because ADF statistics shows that the
values for exports, imports and GDP are smaller than their respective critical
values at 5% level of significance and their probabilities are also greater
than 0.05.
The auto
regressive approach is used for time series data where a current value of the
dependent or explained variable is observed through the lagged and the current values
of independent or explanatory variables. Here null hypothesis is that there is
no serial correlation while alternate hypothesis indicate that there is serial
correlation between the variables.
Table 1 Unit Root Tests
|
|
Exports |
Imports |
GDP |
Inflation |
||||
|
Expt (-1) |
Exc |
Im (-1) |
Exc |
GDP (-1) |
Exc |
Inf (-1) |
Exc |
|
|
t- statistic |
7.31 |
2.66 |
5.23 |
5.66 |
5.87 |
1.72 |
2.67 |
0.20 |
|
Probability |
0.00 |
0.02 |
0.00 |
0.00 |
0.00 |
0.10 |
0.01 |
0.84 |
|
r-square |
0.98 |
0.98 |
0.99 |
0.99 |
0.99 |
0.99 |
0.28 |
0.28 |
After
analyzing Auto regressive model different values are generated for exports,
imports, GDP and inflation. The results shows that t- statistic values for
exports lag 1, imports lag 1, GDP lag1 and exchange rate fluctuation are
significant at 5% level of significance while P- statistic also indicates
significant relationship because value greater than 0.05 for exports lag 1,
imports lag 1, GDP lag1 and exchange rate fluctuation.
Cointegration
test is necessary in time series data to see the degree of integration in the
integrated variables. Cointegration test is used after the variables became
stationary to give robust results. Johenson test is used in this study to observe cointegration between the variables under study.
Null hypothesis indicates that there is no cointegration while alternate
hypothesis indicates that there is cointegration between the variables.
Johenson
cointegration test suggests that for Unrestricted
Cointegration Rank Test (Trace) the value of none and at most 1 at 5%
level of significance is 69.82 and 47.86which is greater than 1.97 and
there P- statistic value is also less than 0.05 which shows that exchange rate
have long term relationship with imports exports GDP and inflation. Similarly
for Unrestricted Cointegration Rank Test
(Maximum Eigen value) the value of T- statistic and P- statistic for none and at the most 1 shows that
exchange rate have a long term relationship with exports imports GDP and inflation
or all the variables are cointegrated with each other. In this case null
hypothesis is rejected and alternate hypothesis is accepted.
·
Exchange rate fluctuations between Pakistan and US have strong impact
on exports of Pakistan. If exchange rate fluctuates abnormally then exports
also fluctuates with same frequency and causes the economy of Pakistan to
became strengthen or weaken.
·
Exchange rate fluctuations also have strong and long term impact on
imports of Pakistan which causes to move imports up and down by bringing the
economy of Pakistan in good or bad situation.
·
Gross domestic product of Pakistan is also affected positively by exchange
rate fluctuation between Pakistan and US which indicates that when exchange
rate value is disturbed then GDP of Pakistan is also affected causing the
economy of Pakistan to become weaker or stronger.
·
Inflation in Pakistan is negatively related with exchange rate
fluctuations between Pakistan and US which indicates that exchange rate does
not affect the inflation rate in Pakistan but in long run it have some
association with inflation rate in Pakistan.
My findings
of the study were in line with Peerman and Farrant (2006), Peridy (2003),
Prasad (1997) and Nishat (2004) as they supported my point that Exchange rate
fluctuations have positive impact on economic factors of Pakistan’s economy but
Kandilov (2008) and Khan (2012) findings were against me that they found
negative impact of exchange rate fluctuations on economic factors of economy of
Pakistan.
·
The government of Pakistan should have to focus on other
economies of the world for trade other than dollar, so that trade should be
balanced and dollar to Pakistani rupee fluctuations should be minimized.
·
In order to improve exports of Pakistan, the economy of
Pakistan must have to stabilize exchange rate fluctuations through proper
exports policy given on annual and semiannual basis.
·
In order to stabilize the GDP growth of Pakistan every step
should be taken for minimizing the exchange rate fluctuations through observing
the neighbors’ countries GDP growth and their standards for minimizing exchange
rate fluctuations.
·
The government of Pakistan should revise all its macro and
micro economic policies and should consider substitute economy for trade
purpose other than US dollar.
·
Inflation should have to be controlled and within certain
limit to improve the economy of Pakistan because if inflation rate is increased
above the normal expectation then trade would seriously be affected and economy
of Pakistan would decline.
·
This research recommend that to stabilize the economy of
Pakistan then the policy regarding the macro and micro economic variable should
focus on short and long term relationship between exchange rate fluctuations
and exports, imports, GDP and inflation of Pakistan.
After
analyzing the data for exchange rate between Pakistan and US on annual basis
and its impact is observed on GDP, exports, imports and inflation from 1990 to
2013 different results are obtained which can help to understand exchange rate fluctuations and its effect on
entire economy.
This
research concludes that economy of Pakistan can strengthen if it is not
fluctuated continuously and remains in stable position for a long time. From
different statistical tests it is concluded that exchange rate fluctuations has
short and long term effect on imports, exports and GDP of Pakistan which means
that with fluctuations in exchange rate between Pakistan and US the economy of
Pakistan would be affected seriously due to disturbance in exports, imports and
GDP of Pakistan bringing the economy of Pakistan in bad position. Inflation is
concerned with exchange rate in long term relation and the impact of exchange
rate could only be seen in long run because in short run exchange rate
fluctuation is not responsible for the changes in inflation rate of Pakistan.
In
order to stabilize the economy of Pakistan the policy makers should focus on
different instruments for stable exchange rate with in Pakistan like forward
and future contracts so that exchange rate can fluctuate within its limits by
not disturbing the whole economic variables necessary for strengthening the
economy of Pakistan.
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