Impact of devaluation on Pakistan's external trade: an econometric approach

Abstract

This paper examines the impact of devaluation on the trade balance in Pakistan. The policy of devaluation (exchange rate management) has been criticised on the ground that it does not improve trade balance. If this is the case then the SAP (Structural Adjustment Programme) of the IMF and the World Bank of which, exchange rate policies are the centre piece, become meaningless. The authors examine this issue by specifying exports, imports, and general price level equations. By estimating these equations simultaneously the authors arrive at the conclusion that devaluation may improve the trade balance in Pakistan. The Marshall Learner conditions were tested and were found to be satisfying the conditions for devaluation to be successful in improving the trade balance. These results are important and may have crucial policy implications in terms of recent devaluation policies adopted by the government. -from Authors