The Impact of Exchange Rate Depreciation on Economic and Business Growth in Pakistan

Abstract

Depreciation remained a common factor in Pakistani economic history in different regimes, which affected different economic variables, especially the growth and business sector. We have linked depreciation with economic and business growth for Pakistan in this paper. Using time series data from 1976 to 2010 and employing cointegration followed by the Error Correction Model, we find that exchange rate depreciation has adversely affected growth in the business sector, notably Investment and FDI, while net export has a positive association with the exchange rate. All these findings reveal that depreciation is not a good practice because it has negative impact for growth in the business sector. The present scenario of the flexible exchange rate doesn't allow the corresponding authorities to set desirable exchange rates, however, the government must reinforce the real sector in order to ensure a stable exchange rate and hence macroeconomic stability.

Keywords: Foreign Exchange; General; Open Economy Macroeconomics; Economic Growth of Open Economies