Study of the impact of Surging Energy Prices on exports of Pakistan

In The Name Of Allah The Most Beneficient And The Most Merciful Research Project: Bank Rate: Myths And RealitiesPrepared BY:Ramish Khan, Wajahat Afzal, Maimoona Abdullah, Shoaib Ahmed Raees, Rija Sohail, Muhammad Owais, WaqarElahi Qureshi

ContentsLIST OF FIGURESIiLIST OF ABBREVIATIONSIiiINTRODUCTION11.1Background Of The Study:21.2Statement Of Problem31.3 Justification31.4 Purpose Of The Study41.4.1 General Purpose41.4.2 Specific Purpose41.5 Basic Assumptions51.6 Definition Of Key Terms51.7 Scope51.8 Limitations5LITERATURE REVIEW6DATA ANALYSIS AND DISCUSSION12SUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATIONS285.1 Summary295.3 Conclusion:305.4 Recommendations:31References33

LIST OF FIGURES Figure No: 1 Interest Rate Movement In Pakistan Figure No: 2 GDP Growth Rate Movement In Pakistan Figure No: 3 Pakistan Inflation Rate In Percentage Figure No: 4 Pakistan Lending Interest Rates In Percentage Figure No: 5 Pakistan Exportsin PKR Million Figure No: 6 Pakistan Imports In PKR Million Figure No: 7 Annual Growth In Money Supply In Percentage Figure No: 8 Pakistan Unemployment Rate Figure No: 9 Chinas Inflation And Interest Rate Figure No: 10 Chinas Exports And Interest Rate Figure No: 11 Chinas Imports And Interest Rates Figure No: 12 Japans Inflation Rate And Interest Rate Figure No: 13 Japans Emports And Interest Rates Figure No: 14 Japans Imports And Interest Rates Figure No: 15 Indias Inflation Rate Figure No: 16 Indias Exports And Interest Rate Figure No: 17 Indias Exports And Interest Rate

LIST OF ABBREVIATIONSGDP: Gross Domestic ProductSBP: State Bank Of Pakistani

CHAPTER-ONEINTRODUCTION

1. Introduction1.1 Background Of The Study:Monetary Policy Constitutes Of The Actions Of A Central Bank, Currency Board Or Other Regulatory Committee That Determine The Size And Rate Of Growth Of The Money Supply . The Major Objective Of Central Banks Is To ManageInflation. The Second Objective Is To Reduce Unemployment, Once Inflation Has Been Controlled.Monetary Policy Is Maintained Through Actions Such As Adjusting The Interest Rate, Or Changing The Amount Of Money Banks Need To Keep In The Vault (Bank Reserves).The Most Common Way For The Central Bank To Conduct Monetary Policy Is By Changing Its Base Rate. The Base Rate Is A Rate That Decides The Interest Rate That Banks Use To Lend To Individuals And Businesses. In Other Words The Base Rate DeterminesThe Price Of Money. Changes In The Interest Rate Affect Different Areas Of An Economy For Example Inflation, Unemployment Rate, GDP, GDP Growth Rate, Balance Of Trade, Exports, Imports And These Are The Main Factors Or Independent Variables Of This Study Which Directly Or Indirectly Affect The Interest Rate Movement In Pakistan. State Bank Of Pakistan (SBP) Is The Central Authority That Is Responsible For The Appliance Of The Monetary Policy In Pakistan. Changes In Interest Rate Bring Fluctuations In Inflation By Expanding And Contracting Money Supply. If There Is Inflation In ACountry, TheCentral BankControls Inflation Through The Increase In Its Rate Of Interest, So Commercial Banks Will Increase Their Rate Of Interest, AccordinglyThe LoansWill Decrease, And Output And Prices Will Also Decrease. In This Way Inflation Can Be Controlled, I-E WhenCentral BankIncrease Its Interest Rate, The Commercial Banks Increase Its Interest Rate, Borrowing Will Decrease, Output And Price Will Decrease And Inflation Can Be Controlled. On The Other Hand When ACountryIs FacingDeflation To RemoveDeflation,Central BankWill Decrease Bank Rate, The Commercial Banks Will Also Decrease The Bank Rate, So People Will Get More Loans. So Output, Employment And Price Level Will Increase AndDeflationCan Be Controlled.Fluctuations In Interest Rate Do Not Have A Uniform Impact On The Economy. Some Industries Are More Affected By Interest Rate Changes Than Others, For Example Exporters And Industries Connected To The Housing Market. And, Some Regions Are Also More Sensitive To A Change In The Direction Of Interest Rates. The Markets And Businesses Most Affected By Changes In Interest Rates Are Those Where Demand Is Interest Elastic In Other Words, Demand Responds Elastically To A Change In Interest Rates Or Indirectly Through Changes In The Exchange Rate. Good Examples Of Interest-Sensitive Industries Include Those Directly Linked To The Housing Market Exporters Of Manufactured Goods, The Construction Industry And Leisure Services. In Contrast, The Demand For Basic Foods And Utilities Are Less Affected By Short-Term Fluctuations In Interest Rates And Is Affected More By Changes In Commodity Prices Such As Oil And Gas.1.2 Statement Of ProblemInterest Rate Is The Most Important Component That Directly Affects The Economic Growth Of A Country. In The Current Economic Condition, It Is Very Important To Look Into Those Factors That Are Directly Affected By The Interest Rate. Explaing The Philosophy And Impact Of Interest Rate On The Economy And Determining The Factors That Positively Or Negatively Affect The Interest Rate Is The Main Area Of The Research And Issues Related To The Factors Negatively Affecting Interest Rate Needs To Be Analysed.1.3 JustificationThe Reason Behind Conducting This Research Is To Find Out What Are The Factors Which Are Affected By The Changes In Interest Rate So It Is Very Necessary To Take Into Account Those Key Factors That Are Affecting The Interest Rate Of Pakistan. Because Interest Rate Is Very Important For Any Country As They Determine The Level Of Monetary Activity And Directly Associated With The Economic Growth Of A Country.

Figure No.:1 Interest Rate Movement In Pakistan

[Source: Www.Tradingeconomics.Com]1.4 Purpose Of The Study1.4.1 General PurposeThe Purpose Of This Study Is To Identify The Changes Ooccuring On Different Factors Of Pakistans Economy Due To The Change In Interest Rate In Pakistan And To Assess The Strong Impact Of All Independent Variables On Dependent Variable That Is Interest Rate.1.4.2 Specific Purpose To Explain The Philosophy And Impact Of Interest Rate On Pakistans Economic Factors. To Investigate How Economic Growth Is Affected By The Change In Interest Rate. To Analyze All The Important Factors And Detect Which Of These Factors Are Significantly Affected By The Interest Rate. To Study The Influence Of Inflation And Other Economic Factors On The Interest Rate Of Pakistan And Vice Versa.1.5 Basic AssumptionsIt Is Anticipated That Interest Rate Volatility And All The Variables Taken Into Account Have A Deep And Strong Relationship With Each Other And These Variables Play A Very Important Role In The Economy Of A Country. 1.6 Definition Of Key TermsBank Rate/ Discount Rate/Interest Rate: The Rate At WhichCentral BankAdvances Loans To Commercial Banks.GDP: Total Market Value Of The Final Goods And Services Produced Within A Country During A Particular Year.1.7 ScopeThis Study Is Beneficial As It Investigates The Effect Of Independent Variables On Dependent Variable That Is Interest Rate Movement In Pakistan From 1992 To 2015. This Research Is Helpful In Determining The Main Effects Of Bank Rate Movement In Pakistan.1.8 LimitationsThe Study Has A Limited Scope As It Is A Secondary Research And Limited Only To The Few Factors Of An Economy. There Are Some Basic Variables, Which Are Considered To Be Of Utmost Importance However, There May Be Many Other Determinants, Which Are Not Taken Into Consideration But Have Strong Influence On The Study.

CHAPTER-TWOLITERATURE REVIEW

Literature ReviewThis Section Discussed Scholarly Theoretical And Empirical Literatures, Which Are Important In Consideration To The Research Topic As It Will Be Helpful In Understanding The Inputs, Which Have Been Used, And To Determine The Gap That Needed To Be Closed Through This Study. Another Important Purpose Of Writing Literature Review Is To Have Necessary Knowledge Regarding The Topic Under Study. These Articles Will Be Helpful In Conducting Further Research.The Articles Reviewed Used Many Different Variables And Various Test Were Conducted To Find An Appropriate Conclusion In Every Research. Every Study Has Some Link With The Previous Study. The Test Used Was Regression, Unit-Root Test, Co-Integration, Correlation And Error Correction Strategy. The Time Period Of Every Study Vary Greatly. The Articles Taken Into Account Belong To Different Economies But The Dependent Variable Of Every Article Was Same That Is Exchange Rate Except The Study Of Atiq-Ur-Rehman Where The Rate Is Used As An Independent Variable. Some Authors Like Yan Li And Zakaria Have Compared The Bank Rate Of Many Countries Together. All Studies Were Secondary In Nature And Used Many Different Sources To Obtain Data.Razi Used In His Study Several Variables Out Of Which Many Of The Independent Variables Are Positively As Well As Negatively Related To Bank Rate Movement. Farrukh In Addition Just Focused On Bank Rate As An Important Component Of Economic Growth. Shabana In Her Study Has Mainly Considered Two Key Variables That Have Strong Impact On Bank Rate Of Pakistan But The Duration Of Her Research Vary Greatly As Compared To Previous Articles Reviewed. Saeed Made Efforts To Find Out The Determinants Affecting Bank Rates But Only In Long Run. Zahoor Looked On Other Variables Such As Reserve Money And Manufacturing Products Responsible For Bank Rate Predictability. Iqbal In Connection With The Above Mentioned Reviews Have Focused Mainly On Macro Economic Variables. Muhammad Conducted The Same Research As Razi But Used Unconventional Approach. Salim Made Further Modifications By Stating That There Is A Negative Relationship Between Vitality Of Bank Rate And Foreign Trade. Lious And Anita Have Also Studied Macro Economic Variables But Of Nigerian And Indian Economies. Imran And Hassan Have Discussed Inflation In Detail In Accordance With The Unpredictable Rates.

Raziet. Al.In Their Study Presented Bank Rate Volatility And Recommended That Bank Rate Has Greater Impact On Profitability Of Businesses If They Have Foreign Direct Investment. Main Determinants Used In Their Study Include Interest Rate, Inflation, Current Account Deficit And Public Debt. This Article Further Discussed How Independent Variables Affect The Bank Rate And What Changes Take Place In Overall Economy Of Pakistan. Data Is Collected By Using Secondary Sources. Data Collected For The Period Of 2001 To 2011 With 10 Numbers Of Total Observations. The Research Used Multiple Regression Equation In Order To Analyze The Relationship Between Bank Rate Represented By Y ( Dependent Variable) And The Inflation Rate, Current Account And GDP Represented By X ( Independent Variable). The Result Of This Research Summarize As Independent Variables Deeply Related With Dependent Variable. It Showed That Bank Rate Change With The Changes In Economic Factors. Analysis Showed That Independent Variables Have Positive And Negative Relation With Bank Rate And Havingstrong Correlation Coefficient And Coefficient Of Determination.Therefore, This Model Wasoverall Significant. (Amir Razi, 2012)Based On The First Literature Review This Article Is Consideredbecause It Includes More Variables That Cause Bank Rate Volatility. Furrukh Bashir Et. Al. Analyzed That Real Bank Rate Is An Important Component In The Growth Of The Economy As It May Increase Export And Decrease Import Activities In The Country. As First Study Only Focused Regression, So In Addition This Study Used Co-Integration, Error Correction Model, Unit Root Test And VAR Lag Order. This Study Aimed To Examine The Determinants Of Bank Rate In Pakistan. Data Was Collected From 1972 1973 To 2012 2013. The Study Concluded That Real Bank Rate Depreciates Against Trade Deficit And Price Level. This Literature Has Covered A Broad Period Starting From 1975-2010 But Study Focused On Inflation And Growth Rate Only. Shabana Parveenet. Al. Studiedthat Equilibrium In Exchange Rate Is Determined When Demand And Supply Of Foreign Currency Vary. As The Demand Increase Or Decrease For Any Currency, It Obtains The Clearing Price For That Currency.The Stationarity Of Data Was Determined, By Using Augmented Dickey-Fuller Test. Akaike Information Criterion And A Linear Regression Model Were Also Used. Stationary Of The Variables Were Checked First By Using Intercept And Then An Intercept And A Linear Deterministic Trend Was Included. The Study Concluded That Inflation And Growth Rate Have A Negative Relation With Bank Rate. (Shabana parveen, 2012)Atiq-Ur-Rehmanet. Al. Considered Exchange Rate Here As A Variable That Directly Controls The Balance Of Trade In A Country. The Variables He Used In His Study Were Bank Rate, Export And Import. Data Obtained From World Development Indicators (WDI) 2010 Database. JS Curve Theory Was Used To Find Out Appropriate Results. Results Of Pak Currency Depreciation Increase Debt Burden So It Was Recommended To Apply Such Policies That Stabilize Bank Rate Movement To Avoid Debt Burden.(Atiq UR rehman, 2012)Zahoor Hussain Javedet. Al.Collected Data From 1982 To 2007 And Investigated The Relationship Between Economic Growth And Exchange Rate Unpredictability In Pakistan. Economy Growth, Exchange Rate, Imports, Exports, Manufacturing Products (MP) And Reserve Money Are The Main Variables Used In The Study. This Study Has Focused On The Economic Problem Faced By Developing Countries Due To Unpredictable Bank Rates. Error Collection Mechanism And Autoregressive Lag Model Were Used And It Was Found That An Empirical Relationship Exist Between Economic Growth And Bank Rate Unpredictability. Co-Integration Relationship Between All Variabes Was Found In Long Run Except Import And Export.The Result Was That The Domestic Economic Performance Was Exceptionally Touchy To Uncertain Bank Rate In The Long - Run Period.(Zahoor Hussain Javed, 2009)Iqbal Mahmoodet. Al.Stated That Bank Rate Directly Affects The Macroeconomic Variables Of The Country And It Further Discussed That Whether Changes In Bank Rate Influence The Macro Economic Variables In Pakistan. Data Was Collected From 1975 To 2005 With A Series Of 31 Observations. This Study Was Conducted In Order To Determine Whether The Uncertainty Of Bank Rate Affect The Macroeconomic Variables Or Not. Autoregressive Model Was Used To Determine The Stationary Levels Of All Variables. GDP, FDI, Trade Openness And Growth Rates Were The Independent Variables Which Directly Affects The Dependent Variable That Is Bank Rate. The Result Of This Paper Shed Light On The Fact That Bank Rate Has A Great Impact On Macroeconomic Variables In Pakistan And Bank Rate Volatility Has Positive Effects On GDP, Growth Rate And Trade Openness But Has An Adverse Relationship With FDI. (Iqbal Mahmood, 2011)Mohammad Ahmed Conducted His Study On Determinants Of The Bank Rate In Pakistan Since 1982 By Using Unconventional Approach. It Investigated The Important Factors, Which Encourage The SBP To Announce Changes In The Rupee. Error Correction Model And Auto Regression Technique Were Used. In Integration And Co-Integration, Vector Auto Regression Techniques Have Been Used. Concluding That In The Short Run One Must Do Discretionary Management Of Pakistani Rupee With The Movement Of Dollar And In Long Run Relative Inflation Should Be Redeemed. Under Suitable Condition, The Burden Of Adjustment And Recession May Occur In Pakistani Export Sector.(Ahmed, 1992)Louis Kuij Represents A Macroeconomic Condition Of Nigerian Economy By Using Data From 1983 To 1997. The Paper Discussed Estimated Long Run Relationship Of Markets Of Money, Foreign Exchange And Output. Dynamic Equations Were Used For Price Level, Real Bank Rate And Output. The Three Important Variables Used Were Inflation, Bank Rate And Output. The Results Were Instrumental In Explaining The Role Of The Foreign Exchange Market And Depreciation Of Exchange Rate Since 1985 And The Effect Of Inflation During 1991-97.(Kuijs, 1998)Muhammad Zakariaet. Al. Examines The Role Of Variables That Determines Nominal Exchange Rates In Pakistan. Quarterly Data Collected For The Period Of 1983 To 2004 For 12 Major Countries Namely Australia, France, Germany, Italy, Japan, Kuwait, Korea, Malaysia, Singapore, Switzerland, The United Kingdom And The United States. Generalized Methods Of Moments (GMM) Estimation Was Used. The Correlations Coefficients Were Highly Positively Correlated. The Result Showed That Nominal Bank Rates Depend On A Number Of Variables Both In Local And Foreign Economy. Specially Policy-Induced Shocks Were Shown To Be The Cause Of Instability In Nominal Bank Rate.(Muhammad Zakaria, 2007)

Theoretical Framework

CHAPTER-FOURDATA ANALYSIS AND DISCUSSION

Data Analysis and DiscussionMany Variables Have A Direct Or Indirect Affect On The Bank Rate Of Pakistani Rupee. The Variables Used In The Analysis Include Discount Rate, GDP Growth Rate, Inflation, Export And Import.4.1 Bank Rate In Pakistan:The Bank Rate Is The Interest Rate At Which Commercial Banks Are Allowed To Borrow From The Central Banks Discount Window On An Overnight Basis. Central Banks Use This Monetary Policy Tool To Control Money Supply In The Economy In Order To Achieve Price Stability And Economic Growth Targets.4.2 Analysis Of Variables:4.2.1 GDP Growth Rate In Pakistan:GDP Is The Total Market Value Of All The Final Goods And Services Produced Within A Country During A Particular Period. Pakistan Is A Developing Country And Its Economy Is The 27th Largest Economy Of The World In Term Of Purchases.The Main Reasons In Decline Of GDP Includes Illiteracy,Corruption, Unemployment, Lack Of Foreign Investment, Low Level Of Productivity, Political Instability And Law And Order Situation In The Country. With The Increasing GDP, The Demand For Goods Will Also Increase As It Is Estimated That GDP Is Positively Related To Interest Rate Volatility. If The Growth Rate Is High It Would Be Beneficial For Both The Importers And Exporters Because They Can Enjoy Maximum Benefits With The Increased Growth Rate.Pakistan Is One Of The Least Developed Countries In Asia. It Has A Semi-Industrialized Economy That Relies Mostly On Agriculture, Manufacturing And Remittances. Pakistan Economy Incorporates Multiple Essential Elements Such As Traditional Farming In Village Areas As Well As Modern Agriculture, Advance Commercial Enterprises, Handicrafts And A Huge Number Of Administrative Services. Services Or Simply The Trade Sector Are The Real Source Of Financial Development Representing A Large Portion Of Pakistans Aggregate National Income With Around 33% Workers Employed In This Division. The Development In Industrial Sector Specifies That It Has Shown A Substantial Growth In Contrast With Other Two Sectors With The Passage Of Time. The Gross Domestic Product (GDP) In Pakistan Expended 4.14 Percent In 2014. The GDP Growth Rate In Pakistan Averaged 4.92 Percent From 1952 To 2014, Reaching On A Height Of 10.22 % In The Year 1954 And The Lowest Record Was Of -1.8% In 1952. Although Since 2005 Has Been Growing At An Average 5% Per Year But It Is Not Enough To Keep Up With The Fast Growing Population. The Pakistan Bureau Of Statistics Reports GDP Growth Rate In Pakistan.Figure No.:2 GDP Growth Rate Movement In Pakistan

[Source: Www.Tradingeconomics.Com]4.2.2 Inflation Rate In Pakistan:Inflation Rate Is The Percentage Rate Of Change Of Price Index Overtime. Inflation Is The State In Which The Value Of Money Is Falling And The Prices Are Rising. (Crowther, 2011) Inflation Leads To Uncertainty About The Future Purchasing Power Of Money, Which Ultimately Results In Decreased Savings And Investments. This Also Increases Imports While Discouraging Exports That Lead To Trade Deficit In A Country. In Pakistan, Inflation Is Mainly Caused By Declining Economic Growth, High Tax Rates And Continuous Depreciation In The Value Of Rupee. Due To Inflation Purchasing Power Decreases, It Is Not Good For Retired And Poor People As They Receive A Fixed Amount Of Money So The Spending Power Remains Decreasing Each Month Because These People Hold Less Number Of Tangible Assets And Equities And Mostly Keep Their Investment In The Form Of Cash Or Deposits, Which Ultimately Looses Value During Inflation. Store Of Value Is The Function Of Money, Which Is Also, Weakens Through Adverse Affect Of Inflation In Pakistan. Inflation Is Of Utmost Importance To The Policy Makers.The Countries Having A Higher Inflation Rate Usually Faces Devaluation Of Their Currency In Connection With The Currencies Of Their Trading Partners. Inflation Usually Accompanied By Higher Interest Rates.The Figure Illustrates The Exponential Trend Of Inflation In Pakistan. In Late 1970s And 1990s, There Was A Double-Digit Inflation In Pakistan. Late 1970s Was The Most Unstable Period Of Inflationary Uncertainty For Pakistan. The Inflation Rate In Pakistan Reach On A Height Of 37.14 % During The Period 1973 To 1975 And The Lowest Record Was In 2001 To 2002 Of Just 3%. The Period Of 1973 To 1975 Is The Supposed To Be The Worst Episode In The Inflationary History Of Pakistan And The Main Cause Of High Inflation During This Period Was Hike In Oil Prices And Poor Agricultural Production. A Firm Monetary Policy Along With Fiscal Integration Contributed A Lot In Low Inflation During 2000 To 2003 As This Period Has A Broad Money Growth In Agriculture, Industrial And Trading Or Servicing Sectors.Figure No. 3: Pakistan Inflation Rate In Percentage [Source: Www.Tradingeconomics.Com]4.2.3 Interest Rate In Pakistan:Interest Rates Are The Rent Paid By A Borrower (Debtor) To A Lender (Creditor) For The Use Of Moneyover Time, And They Are Express In Percentage Terms Per Annum. (Faure, 2011). This Study Focused On Lending Interest Rate Of Pakistan.Interest Rate Is One Of The Most Important Factors That Affect The Exchange Rate Movement. Interest Rate Is Helpful For The State Bank Of Pakistan To Reach Its Inflation Target. Inflation And Interest Rates Are Inversely Propotional To Eachother. When The Interest Rate Is High, It Leads To Low Inflationand Vice Versa. Currencies That Have A High Interest Rate Draw Attention Of Many Investors To Seek The Top Most Opportunities For Their Investment. This Is Helpful In Increasing The Demand Of Currency. Lower Interest Rate Leads To Decrease In Exchange Rate. In Pakistan, The State Bank Of Pakistan Takes Interest Rate Decisions. The Official Interest Rate Is The Discount Rate Or The Market Repurchase Rate. (Mirchandani, 2013) Interest Rate In Pakistan Averaged 12.45 Percent From 1972 To 2014reaching At The Height Of 20% In 1996 And Recorded Lowest At 7.5% In 2002. It Was Stable During 2002 To 2004.Figure No: 4 Pakistan Lending Interest Rates In Percentage

[Source: Www.Tradingeconomics.Com]4.2.4 Export In Pakistan:The Products Or Goods Manufacturednationally And Traded Internationally Are Known As Export. Export Encourages People To Exchange Things Worldwide Firstly This Was Done By Using Barter System.But After The Invention Of Currencies It Takes Place Through Exchange Rate.Like GDP, Inflation And Interest Rate Export Is Also An Important Determinant Of Exchange Rate Because Increase In Export Activities Result In Higher Exchange Rate But Currency With Low Exchange Rate Results In Lower Exports. It Means There Is A Positive Relationship Between Export And The Exchange Rate Because When The Export Activity Increases In A Country Its Exchange Rate Becomes More Stable. Due To Advance Technology, Many Of Large Firms Have Winded Their Business And Went Abroad Only A Few Popular Branded Companies Are Left Here.So, The Export Base Of Pakistan Is Not As Strong As Before But Government Of Pakistan Is Consistently Making Efforts To Increase Export Activity. Export Is Helpful In Increasing Revenue Of A Country. It Is Useful In Balancing Growth And Is Advantageous In Gaining New Knowledge And Experience. On The Other Hand, Export May Include Unbearable Costs And The Exporters May Face Rejection Of Products Due To Unfavorable Political Risk. Pakistans Major Exports Includesraw Cotton, Lather And Products Made Up Of Leather, Carpets Rugs And Tents, Synthetic Textiles, Surgical Instruments, Sports Goods, Readymade Garments, Engineering Products, Chemical And Pharmaceutical Products, Vegetables Fruits And Fish, Mineral Feuls, Manufactured Goods, Beverages And Tobacco. Pakistani Mangoes Are The Most Delighted Items That Traded In Massive Amounts To Numerous Countries Abroad. United States, China, U.A.E And Saudi Arabia Are The Primary Export Partners Of Pakistan. The Large Part Of Export Earnings Originates From Textile Sector. Water Scarcity Particularly For Agri-Use And Power Shortage Especially In Southern Punjab Is Another Drawback Of Pakistani Export. Pakistan Has A Higher Export Rate With United States That Is 13.6%. Export In Pakistan Averaged 34120.04 Million PKR From 1972 To 2014 Reaching At The Height Of 275433 Million PKR In 2013 And Recorded Minimal At 830.4 Million PKR In 1976. The Figure Shows A Continuous Increase In Export, Which Is Good For Pakistan Because The Value Of Pakistani Currency Also Increases With The Increase In Export.Figure No: 5 Pakistan Exportsin PKR Million[Source: Www.Tradingeconomics.Com]4.2.5 Import In Pakistan:When The Goodsnot Produced Nationally Or Produce In Very Less Quantity So The Goods Bought From Abroad, It Is Termed As Imported Goods. Many Countries Have To Import Goods Because They Either Cannot Produce It Locally Or Cannot Create Enough Of It To Meet Its Demand. Import Is Helpfulas It Reduce Reliance On The Domestic Markets And Helps In Creating Competitiveness Among Rival Firms In Local Market. On The Other Hand, Imported Items Increases The Risk Of Getting Dangerous Deseases Like Aids Etcfrom The Exporting Country, It Could Increase The Possibility Of Excessive Competition, And The Imported Goods May Be Defective To Some Extent.The Government Of Pakistan Controls Imports Activities In Pakistan. The Main Imports Of Pakistan Are Mineral Fuels, Animal And Vegetable Oils, Crude Materials, Chemicals And Machinery. The Importer Must Have To Make Payment In The Currency Of The Exporting Country.China, United Arab Emirates, Saudi Arabia, United States And Kuwait Are The Primary Import Partners Of Pakistan. Import In Pakistan Averaged 57741.29 PKR Million From The Year 1971 To 2014 Reaching At A Height Of 472228 PKR Million In 2014 And Was Recorded Lowest Of 228 PKR In 1971.Figure No: 6 Pakistan Imports In PKR Million[Source: Www.Tradingeconomics.Com]4.2.6 Annual Growth Of Money Supply In Pakistan:Money Supply Is Defined As The Aggregate Sum Of Money That Is Currently Circulated In A Country. Circulation Of Money Is Being Controlled By The Central Banks. Monetory Policy Controls Money Supply In An Economy Through Change In Interest Rate And After Every Three Months State Bank Announces A New Monetary Policy. It Is Necessary To Control Money Supply Because Its Increase Will Cause Inflation. Purchase Leads To Increase In Money Supply And Sales Leads To Decrease In Money Supply. There Are Some Measures Of Money Supply Includes M0, M1, M2, M3 And M4. M0 Includes Coins And Notes In Circulation That Are Easily Convertible Into Cash. M1 Includes Most Liquid Assets Such As Currency, Travelers Check, Demand Deposits And Other Checkable Deposits. M2 Adds To M1 Other Assets That Are Not So Liquid And Includes Small Domination Time Deposits, Saving Deposits, Money Market Deposit Accounts, And Money Market Mutual Funds. M2 Is Considered Asthe More Advance Form Of Money. M3 In Addition To M2 Also Includes Long-Term Mutual Funds. M4 Also Includes Gold And Land And Are Highly Less Liquid Assets. This Study Focused On M2 As It Has Greater Impact On Exchange Rate. Money Supply Has Shown A Substantial Amount Of Decline During Several Periods. Money Supply In Pakistan Reached At A Height 29.3% In The Year 1993 And Recorded Lowest In The Year 1975 1.2% (In Negative). Figure No: 7 Annual Growth In Money Supply In Percentage

[Source: Www.Theglobaleconomy.Com]4.2.7 UnemploymentIn General, There Is A Trade-Off Between The Evils Of Inflation And Unemployment. As Economic Growth Slows Down, Theres No Risk Of Inflation, But Unemployment Rises. As The Economy Picks Up, More People Go To Work, So Unemployment Drops, But Inflation Looms As A Risk. Interest Rates Are The Rates Charged On Borrowing Money And The Rates Paid On Savings Investments: When Interest Rates Are High, That Makes Borrowing Money Less Desirable And It Makes Saving Or Investing Money More Desirable; The Opposites Are True When Interest Rates Are Low.The Central Bank Has A Tricky Decision To Make. Should It Be Concentrating Towards Boosting The Economy And Encouraging Growth Or Should It Be Taking Steps To Reduce Inflation Levels In The Country. The Announcement Of Reducing The Discount Rate Is Surely A Step In A Positive Direction. But The Challenges Are Persisting. Some Critics Argue That The Reduced Discount Rates Only Serve To Benefit The Rich And Elite While The Poor Suffer Even More Inflation. Hence, Pakistan Might Face Gloomy Prospects.Figure No: 8 Pakistan Unemployment Rate

[Source: Www.Tradingeconomics.Com]Comparitive DataIt Should Be An Eye-Opener For The Policy Makers That Japan, Sweden And Switzerland Are Aiding Their Industrial Sector At Zero Per Cent Discount Rate, Compared To Pakistan.SBP Should Reduce The Discount Rate So As To Give Jumpstart To Economic Activities In The Country. This Initiative Will Not Only Make The Pakistani Products Competitive In The International Market As Fluctuation In Discount Rates Controls The Industrial Input Cost But Also Prove To Be A Big Relief For The Industrial Sector.Comparative Figures For Variables Discussed Above In Other CountriesCHINA In China, The Peoples Bank Of China Monetary Policy Committee Takes Interest Rates Decisions. The PBC Administers Two Different Benchmark Interest Rates: One-Year Lending And One Year Deposit Rate. Content For - China Interest Rate - Was Last Refreshed On Monday, June 29, 2015.Figure No: 9 Chinas Inflation And Interest Rate

[Source: Www.Tradingeconomics.Com]Export Growth Has Been A Major Component Supporting China's Rapid Economic Expansion. Exports Of Goods And Services Constitute 30% Of GDP. China Major Exports Are: Electromechanical Products (57 Percent Of Total Exports) And Labor-Intensive Products Like Clothing, Textiles, Footwear, Furniture, Plastic Products, Bags And Toys (20 Percent). In Recent Years, The Exports Of High Tech Products Have Been Also Growing And In 2012 Accounted For 29 Percent Of Total Exports. Chinas Main Export Partners Are The United States (17 Percent), European Union (16 Percent), ASEAN (10 Percent), Japan (7 Percent) And South Korea. This Page Provides - China Exports - Actual Values, Historical Data, Forecast, Chart, Statistics, Economic Calendar And News. Content For - China Exports - Was Last Refreshed On Monday, June 29, 2015Figure No: 10 Chinas Exports And Interest Rate

[Source: Www.Tradingeconomics.Com]Chinas Main Imports Are Electromechanical Products (43 Percent Of Total Imports). The Country Is Also One Of The Biggest Consumers Of Commodities In The World. Among Commodities The Biggest Demand Is For Crude Oil (12 Percent Of Total Imports), Iron Ore (5 Percent), Copper, Aluminum And Soybeans. Chinas Main Import Partners Are: European Union, ASEAN, Japan, South Korea And Taiwan. Others Include: Australia, South Africa And Brazil.Figure No: 11 Chinas Imports And Interest Rates

[Source: Www.Tradingeconomics.Com]JapanIn Japan, The Bank Of Japans Policy Board In Its Monetary Policy Meetings Makes Decisions On Interest Rates. The Boj's Official Interest Rate Is The Discount Rate. Monetary Policy Meetings Produce A Guideline For Money Market Operations In Inter-Meeting Periods And This Guideline Is Written In Terms Of A Target For The Uncollateralized Overnight Call Rate.Figure No: 12 Japans Inflation Rate And Interest Rate

[Source: Www.Tradingeconomics.Com]Figure No: 13 Japans Emports And Interest Rates

[Source: Www.Tradingeconomics.Com]Figure No: 14 Japans Imports And Interest Rates

[Source: Www.Tradingeconomics.Com]IndiaIn 2013, The Consumer Price Index Replaced The Wholesale Price Index (WPI) As A Main Measure Of Inflation. In India, The Most Important Category In The Consumer Price Index Is Food And Beverages (45.86 Percent Of Total Weight). Housing Accounts For 10 Percent; Transport And Communication For 8.6 Percent; Fuel And Light For 6.84 Percent; Clothing And Footwear For 6.5 Percent; Medical Care For 5.9 Percent And Education For 4.5 Percent. Consumer Price Changes In India Can Be Very Volatile Due To Dependence On Energy Imports, The Uncertain Impact Of Monsoon Rains On Its Large Farm Sector, Difficulties Transporting Food Items To Market Because Of Its Poor Roads And Infrastructure And High Fiscal Deficit.Figure No: 15 Indias Inflation Rate

[Source: Www.Tradingeconomics.Com]In India, Interest Rate Decisions Are Taken By The Reserve Bank Of India's Central Board Of Directors. The Official Interest Rate Is The Benchmark Repurchase Rate. In 2014, The Primary Objective Of The RBI Monetary Policy Became Price Stability, Giving Less Importance To Government's Borrowing, The Stability Of The Rupee Exchange Rate And The Need To Protect Exports. In February 2015, The Government And The Central Bank Agreed To Set A Consumer Inflation Target Of 4 Percent, With A Band Of Plus Or Minus 2 Percentage Points, From The Financial Year Ending In March 2017.Figure No: 16 Indias Exports And Interest Rate

[Source: Www.Tradingeconomics.Com]India Is Heavily Dependent On Crude Oil Imports, With Petroleum Crude Accounting For About 34 Percent Of The Total Inward Shipments. The Country Also Imports: Gold And Silver (12 Percent Of The Total Imports), Machinery (10 Percent), Electronic Goods (7 Percent) And Pearls, Precious And Semi-Precious Stones (5 Percent). Indias Main Import Partners Are China (10.7 Percent Of The Total Shipments), United Arab Emirates (8 Percent), Saudi Arabia (7 Percent), Switzerland (7 Percent) And The United States (5 Percent).Figure No: 17 Indias Exports And Interest Rate

[Source: Www.Tradingeconomics.Com]

CHAPTER-FIVESUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATIONS

SummaryFindings Conclusion and Recommendations5.1 SummaryThis Research Paper Aims To Find Out The Main Determinants That Directly Or Indirectly Cause The Discount Rate Volatility. From 1992 To 2015 Years Of Data Observed To Determine The Main Reasons Of Continuous Devaluation Of Pakistani Currency. All The Variables Used Here Positively Or Negatively Related To Unpredictable Discount Rate Movement Of Pakistani. The Variables Of This Research Include GDP Growth Rate, Growth Rate In Money Supply, Export, Import, Unemployment, Inflation Rate And Interest Rate. State Bank Of Pakistan Being The Central Authority Has Taken Steps To Control Devaluation Of Currency By Adopting Market Based Discount Rate System It Was Beneficial For Some Time But Then Failed Due To Political Instability And Continuous Rise In The Level Of Inflation. The State Bank Of Pakistan Laid The Foundation For Implementing Growth-Oriented Economic Policies And Cut Its Key Interest Rate To A 42-Year Record Low Of 7%. Given The Macroeconomic Conditions, The SBP Board Of Directors Reduced The Policy Rate By 100 Basis Points (1%) To 7%, Which Is The Lowest Rate In Last 42 Years, Governor SBP Ashraf Mahmood Wathra Announced On Saturday After A Board Meeting. The New Rates Will Be Effective From May 25. Since November 2014, It Is The Fourth Cut In The Key Discount Rate A Rate At Which The Commercial Banks Borrow From The Central Bank. Initially, The Central Bank Had Cautioned Against Reducing Inflation Rates. The SBP Has Lowered Its Key Interest Rate At A Time When The Federal Government Has Decided To Implement Growth-Oriented Economic Policies From The New Fiscal Year, Beginning From July. The Industrialists Have Long Been Demanding The Central Bank To Set The Interest Rate Below 8% Aimed At Reducing Their Cost Of Business. Finance Minister Ishaq Dar Has Already Announced His Governments Plan To Introduce Growth-Oriented Economic Policies In The New Budget, Which Will Be Unveiled On June 5. The Reduction In The Policy Rate Will Promote Business Activities In The Country And Reduce The Input Cost, Wathra Said. However, He Said There Were Other Factors Like Availability And Prices Of Gas And Electricity That Also Affect Industrial Growth. Despite Significant Reduction In Interest Rates, So Far The Monetary Policy Is Not Working Its Way Through The Economy, As The Government Remains The Single Largest Borrower Due To Steep Decline In Tax Revenues, According To The Independent Experts. This Has Left Very Little Credit For The Private Sector To Borrow. Further, Wathra Said That After Previous Reductions In Policy Rates, Two Important Developments Took Place. There Was Significant Growth In Long-Term Loans And Trade Financing Quantum Also Jumped, He Said. Working Capital Requirements Reduced Due To Steep Decline In Commodity Prices, He Added. The Board Also Reviewed The Interest Rate Corridor The Band Of Minimum And Maximum Interbank Rates, Cutting The Upper Ceiling By 1% To 7% And Fixing Lower Cap At 5% By Bringing It Down From 5.5%. The SBP Governor Also Announced A New Target Rate, Setting It At 0.5% Lower Than The Key Discount Rate. SBP Will Have To Have More Active Open Market Operations So That The Market Repo Rate Reflect The SBP Attention Of Keeping Market Rate Close To The Policy Rate. This Is Aimed At Reducing Volatility In The Money Market, The Former SBP Governor Added.Twenty-Three Years Annual Time Series Data Incorporating Twenty-Three Total Numbers Of Observations Have Been Use To Find Out The Main Factors Affecting The Discount Rate. Graphs Are Drawn To See The Variations In The Values Over Long Periods.

Linear Regression, Coefficient Of Determination And Correlation Were Run To Find Out Main Factors Responsible For Discount Rate Volatility And It Was Found That Discount Rate Is Secondary Affected By GDP Economic Growth And Export. These Factors Are Indirectly Related To The Discount Rate As If The Export Activities Increases Within A Country It Will Help In Increasing The Value Of Pakistani Rupee. The Third Most Important Variable Is Inflation As A High Inflation Reduces The Value Of The Currency. All Other Variables Considered Are Of Less Importance Because They Are Not Significantly Affecting Discount Rate Activities In Pakistan. The Result Of Correlation Also Shows That GDP Is Highly Correlated With Discount Rate. A Change In GDP Results In The Indirect Change In Discount Rate .

5.3 Conclusion:The Theme Of This Research Project Is To Describe And Analyze The Determinants That Are Responsible For The Devaluation Of Paksitani Rupee. The Current Study Tells That GDP Economic Growth Rate Of Pakistan And Exports Are The Main Variable That Is Responsible For The Variations In Discount Rate Asit Represents The Total Amount Of Goods And Services Produced In A Country. As More And More Goods Produced In A Country Will Increase The Export, Which Ultimately Leads To An Increase In Discount Rate.When The Export Increases The Value Of Currency Also Increases Devaluing Other Currencies. So, These Two Variables That Are GDP Economic Growth Rate And Export Are Indirectly And Significantly Related To Discount Rate Of Pakistani Rupee. There Is An Inverse Relationship Between Inflation Rate And Discount Rate Of Pakistan As High Inflation Rate Lowers The Discount Rate. These Three Factors Are Very Much Accountable For The Exchange Rate Volatility And Controlling These Variables Is Important As They Are Consistently Devaluing The Pakistani Rupee. The Other Variables Are Money Supply, Import, Foreign Exchange Reserve And Interest Rate That Are Affecting Discount Rate Movements With In A Country.5.4 Recommendations: The Most Important Fact Is That The Export Activities In Pakistan Should Be Increase In Order To Avoid Currency Depreciation. Monetary And Fiscal Policies Must Be Mading More Effective As It Will Help In Reducing Inflation And Will Strengthen Economic Growth. The Debt Burden Should Be Reducing Because Increased Debt Burden Decreases The Value Of The Currency And Pakistan Is The Country That Buried Under A Huge Burden Of Debt. Political Instability Also Plays An Important Role In Devaluation Of Pakistani Currency, As It Negatively Related To Discount Rate So The Law And Order Situation Must Be Keep Stable In Order To Reduce Discount Rate Volatility. Despite Of The Factors Illustrated Above It Is Important To Focus On Other Variables Such As Socio-Economic Policies And Political Scenrios As Well Because Their May Be Many Other Variables That Are Responsible For Devaluation Of Pak Rupee. So Further Study In This Regard Using Some Other Variables May Be Conducted To See The Affect Of Discount Rate On Pakistani Rupee Against Some Other Currency Like Euro, Yen, Rayal Etc.

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