Effect of 1972 Devaluation on Pakistan's Balance of Trade

A. R. Kemal, Zahira Alvie

Abstract


In most of the developing economies, a rapid growth of G.N.P.
invariably implies a larger import bill. Capital goods necessary for
development have to be imported and a higher level of income in turn
implies an increase in the import of consumption goods. On the other
hand, demand for primary goods, which are main exports of developing
countries, is inelastic. Moreover, the develop¬ing countries face
serious problems in selling their manufactured products in the world
market, partly due to their relatively inefficient industrial structure
and partly due to the restrictive import policies of the developed
countries. This results in a deficit in the balance of payments of many
developing countries. To meet the deficit, import restrictions and
export encouragement policies are followed instead of devaluation, which
is resisted on both economic and non- economic grounds. This study has
as its objective an analysis of the effects of the: devaluation of
Pakistani rupee in May 1972, which changed the par value of Pakistan's
rupee from Rs. 4.76 to Rs. 11.00 per U.S. dollar. Prior to the 1972
devaluation, imports were restricted through tariffs and quotas. In
addition, certain pro¬ducts could be imported only under bonus and
cash-cum-bonus lists. On the other hand, exports were encouraged through
Export Bonus Scheme, Pay-As- You-Earn Scheme, and similar other
incentives. These measures led to a multiple exchange rate regime. These
measures may have had some beneficial effects in the short run but as
Soligo and Stern [26] have shown over the long run, they led to a
misallocation of resources. Pakistan devalued her currency in May 1972,
as stated by the then Minister of Finance in his speech, to end the flow
of foreign exchange abroad, stop over invoicing of imports and under
invoicing of exports, correct the misallocation of resources, curb
uneconomic import

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DOI: https://doi.org/10.30541/v14i1pp.1-22

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