Exchange Rate Policy and Trade Performance in Pakistan

The exchange rate is an important tool for enhancing exports in emerging economies. To quantify the role of the exchange rate in determining trade in Pakistan, this paper presents estimates of the elasticities of relative prices, demand, and exchange rates across various categories of export and import demand for Pakistan’s economy. Our results indicate that the exports of manufactured and intermediate inputs are more responsive to changes in relative prices and exchange rates than the exports of primary goods. Furthermore, the higher magnitude of the elasticity of exports with respect to foreign demand suggests that Pakistan's exports are more responsive to foreign demand. Regarding import demand functions, our results show that the exchange rate plays an important role in impacting the demand for primary and manufactured goods imports, while domestic income drives the demand for intermediate goods imports. Overall, the exchange rate and foreign demand have played a significant role in enhancing exports in Pakistan.