Economic Analysis of Impact of Foreign Exchange on Trade Balance Sector of Pakistan

Abstract

The present study investigates the impact of exchange rate movements on the level of exports and imports in Pakistan. The study based on time series both annual as well as quarterly data. Annual data covers a period about 40 years, starting from 1970-2012, whereas, quarterly data focuses from 2000 to 2012. Johnson co-integration techniques were employed for the estimation of quarterly observations. It reveals through the results that at first Pakistan’s trade volume with developed countries including U.S.A, U.K and Europe. Later on, mixture of Pakistan exports and imports improved over the time. A larger proportion of primary goods replaced with semi manufacturing and manufacturing goods, whereas, imports of capital goods, consumer goods and petroleum products widened. The nature of response of export and import to exchange rate dynamic supports the theoretical background being low price elastic. Alternatively, if value of rupees fall against dollar, then the magnitude of import bill rises more as compared to export bill. The study suggests that Pakistan should reduce the concentration of trade with few countries and diversify its trade. Similarly, the lower base of commodities may increase to a number of other commodities.

Keywords: BoP, VAR, Co-integration, Unit root, Augmented Dickey fuller, Corrollogram