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What Fluctuates Currency Value?

---PKR Tantrums
Executive Summary
The relative power of a currency against another is determined through numerous factors. This
power fluctuates with the changes in the determinants, this paradigm is known as currency
depreciation; when the factors tend to decrease the power of domestic currency versus the other.
Pak Rupee is subject to these tantrums. The biggest of all came in 2008 following the global
financial crisis. The main reasons behind such sharp deterioration is bad economic condition, level
of public external debt, political instability in the form of terrorism, law and order situation,
shrinkage in foreign portfolio investment and bad performance of stock market in Pakistan. The
purpose of this research study is to analyze impact of these factors on the currency value. This
study would use monthly secondary data from 2003 to 2012. Both descriptive and inferential
statistics are to be used to analyze data.

Objective Statement:

To study the impact of foreign portfolio investment on currency value i.e. exchange rate.

To study and analyze the effects of external debt on the exchange rate.

To investigate the implications of political instability on the value of Pak rupee.

To analyze the impact of fluctuations in stock market i.e. KSE on the exchange rate.

To study the predicaments of financing through debt and equity on macro level.

Project Description
This project revolves around the capital structure of Pakistan that is raised through external
sources. The study will analyze the other sources of foreign inflows, and stock exchange
downturns along with non-economic factor of political environment and their impact on currency
in the form of exchange rate. Meanwhile modifying the works of Malik (2014) Determinants of
Currency Depreciation in Pakistan; by adding in External Debt, Stock Index Changes and
Political Instabilty and removing the variables of Stock returns and terrorism. The methodology
however remains the same as followed by Malik in his research. The components of capital
structure understudy would be limited to Foreign Portfolio Investment (Equity) and external debt
(Debt), since these sources involve foreign exchange there are predicaments shoved upon currency

value i.e. exchange rates. Any inflow or outflow is bound to change the rates of PKR in terms of
US $. Meanwhile currency value is influenced by the ups and downs in the stock market and
political instability. The purpose of this study is to put together these variables and look for relative
responses thereof.

Theoretical Framework:

Foreign Portfolio
Investment (FPI)

External Debt
(ED)

Currency Value
(CV)

Political Instability
(PI)

Stock Index changes


(SI)

Methodology
Data would be collected through secondary sources, for FPI (independent), ED (Independent), PI
(Independent), SI (Independent) and CV (dependent) variables. The data thus collected would be
adjusted against inflation i.e. CPI. The relations among dependent and independent variables will
be regressed through STATA. Both descriptive and inferential statistics are to be used to analyze
data.
This study will first check stationarity of data by using ADF Unit Root Test. The result of ADF
test would show that whether all series are stationary at level or not and later taking first difference
with and without trend. Therefore, ordinary least square method can be used to test impact of
independent variables on dependent variable. Correlation is used to check relationship among

variables. Ordinary Least Squares (OLS) Methods is used to test impact of independent variables
on dependent variable i.e. currency value.

Sources of Data
This study would use monthly secondary data from 2003 to 2012, making 120 observations for
each variable. STATA will be is used to analyze data. Currency value is calculated taking first
difference of exchange rate series. Monthly closing exchange rate of US $ against Pakistani Rupee
is taken from official website of State Bank of Pakistan. The monthly data of foreign portfolio
investment is retrieved from website of State Bank of Pakistan. External debt data is retrieved from
website of State Bank of Pakistan. For fluctuations in Stock exchange index, KSE 100 index data
is retrieved from KSEs official website. For the political instability readings proxy of Pakistan
Conflict Tracker is to be used.

Conclusion
Foreign inflows in the form of external debt and portfolio investment are among main sources of
exchange earnings that help in savings and economic growth. Inflow of foreign portfolio
investment will increase supply of foreign currency and ultimately help in reducing exchange rate.
As depreciation in currency is due to more demand of US $ than supply, so supply will impact
positively. However, if outflow of foreign portfolio investment is more that inflow or net foreign
portfolio investment is lower and exchange is rising, it will have negative relationship. Same would
go for the external debt except that it would involve fixed payments of interest mark up and would
not create healthy finance for the economy and it is most probable that the cash flows turn out to
be negative beating Pakistani Rupee in terms of currency value.

References
Malik, S.-U. (2014). Determinants of Currency Depreciation. Munich Personal RePEc Archive.