Pakistan’s most recent economic crisis as witnessed in the 2019-2023 period (high inflation, low growth, low foreign exchange reserves) has also seen the longest period of implementation of a market determined exchange rate regime as part of the IMF conditionalities under its three-year program starting March 2019. This paper analyses this shift away from a managed exchange rate regime towards a market determined regime, over a period of ten years i.e. 2013-2023. We find that between July 2019 and February 2023, the nominal exchange rate depreciated by 114.5 percent against the US Dollar, while the REER index showed a depreciation of 17.4 percent, it has not resulted in a significant increase in exports and imports have remained persistently high. Our analysis shows that even large depreciations do not override the inelastic response of exports to changes in the value of the Pakistani Rupee. We further find that demand for imports is driven by our domestic growth which is stimulated by large fiscal deficit. We also find that compared to other key macroeconomic variables, fiscal deficit contributes the most to building exchange rate depreciation pressures. In the light of these findings we argue that while a market driven exchange rate is a better means of ensuring competitiveness, it still requires prudent degree of management to ensure short-medium term stability in the exchange rate. However, the reserve levels can override any attempt at exchange rate stabilisation.
A Sun, study studied this question.