IMPACT OF CURRENCY DEVALUATION IN PAKISTAN

Abstract

Pakistan’s currency value has decreased dramatically over the past 2-3 decaded which has happened due to a variety of significant economic issues, but continuing inflation is the main source of worry for the average citizen. The devaluation of the rupee has come to be widely believed to be Pakistan's primary cause of inflation. On the other hand, the official position is that the need for a devaluation is due to the increase in domestic prices. Plus if we talk about exchange rates since the collapse of the Bretton Woods system, discussions of policy have focused on the connections between exchange rates, domestic prices, and international prices. A key point to note is that stable exchange rates guarantee macroeconomic stability, which has a positive effect on economic growth and thus a country prospers. Inefficient use of resources and capital can result from misaligned exchange rates, which can also reduce economic efficiency. One of the earliest hypotheses establishing the connection between exchange rates, domestic price levels, and foreign price levels is the purchasing power parity (PPP) hypothesis. Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. It allows for economists to compare economic productivity and standards of living between countries. Some countries adjust their gross domestic product (GDP) figures to reflect PPP. In policy terms, exchange rate management is at the center of many financial stabilization plans and PPP provides a theoretical basis for external adjustment policy - At the theoretical, empirical, and policy levels, PPP theory has broad ramifications. For instance, the monetary approach to determining exchange rates uses PPP as a fundamental building block. Therefore evaluating the PPP theory is crucial since its results are applied in numerous current studies on international finance as well as crucial policy choices.