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Devaluation Of Currency
Devaluation refers to the reduction and depreciation in the value of currency with respect to other monetary units.

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Causes of devaluation

Exchange rates The rate at which one nations currency can be exchanged for that of another.
Rates impact and are impacted by international trade in free market system to maintain a BOT and Balance of capital
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How Exchange rates effects currency

Demand of currency determined by

By demand for countrys export and investment

Decrease in demand of currency causes devaluation

Pak has less exports+ low investment rates

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Balance of payment
BOP provides us with important information about whether a country is paying its way in the international economy or not.

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IMPORTS
3050 m. Feb. 2011

EXPORTS
2050 m. Feb 2011

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Cause of incomparable value of exports

Export of raw material

Increase in price level

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Inflation
Inflation refers to continual rise of price
level. When inflation occurs, purchasing power of a unit of money decreases.

Inflation rate of Pakistan is 12.91 % as per

figure of Feb,2011

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Law & Order situation

Political instability Corruption+ Exploitation of citizens
Devaluation of Currency

Bomb explosions

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Expansionary fiscal or monetary policies

Government. adopt policies that cause aggregate

demand to grow at a pace higher than domestic supply. The gap filled by imports.

Previous Government resorts to borrowing from the

central bank or from foreigners. This increased inflation.

Weaknesses of domestic financial system

Contribute to the eruption of a crisis

Foreign capital plays an important role in economic development Case of the Pakistan at the time of (9/11).

Capital flight
Foreign directive investments: if the residents of an open economy opens up a company abroad, this investment actively managed. Foreign portfolio investment: if any resident buys stock of foreign company.

Variables for causing capital flight:

Real interest rate paid on foreign assets. Real interest rate paid on domestic assets. Perceived economic and political risk The Government policies

Speculative pressure
Speculation means rumors about any condition in country. Such as political situation, according to this, if there is a speculation that in future countrys political condition will most worse so people withdraw their money from banks and shift it towards foreign countries.

Advantages of Devaluation

Boost for domestic demand Current account deficit . Higher rates Inflow of money Increase in employment Decrease demand for foreign goods

Balance of payment Equilibrium in value of currency Increase in Investment Maintaining BOP Industrial Growth Economic Development Increase the World market

Disadvantages of devaluation

Price level increases Retaliation Foreign debts Shortage of goods at home market Inelastic exports Increase in import bill

Impact of devaluation
A recent positive impact on PAK economy

16% rise in earnings Rs 23 billion in terms of Pakistani currency 21% growth 5% impact of the devaluation

Benefits
Cotton cloth
showed 22% growth in its exports cotton yarn 2% garments 38% art, silk, synthetic textile 142% textile materials marked 84%

Leather garments
11% while footwear and canvas footwear showed a negative trend 5.18 billion dollars compared to 4.43 billion dollars in the same period last year.

Remedies
Correcting the BOP

Increase in foreign earning Import of essential items only Minimize expenditure on invisible imports

 Stable monetary policy Fiscal policy Maintaining law and order situation Political stability leading to economic
stability Investor friendly corporate environment

Increasing Export lead growth

Promotion of labor intensive industries Diversification of exports Restoration of sick industries Reduction in export duty Creation of export agencies Joint ventures

Devaluation in Pakistan
In 1955 due to inelastic production structure In 1972 In 1982 due to shift from fixed to managed float
system In 1997 Improvement dollar stabilized from 2002 to 2006 Devaluation continued up till now

cONCLUSION
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