Background and History

Pakistan has unusual history of successive devaluation. The rupee was first devalued in 1950 in response to a similar move by India. Later in 1972, Z.A. Bhutto’s government massively devalued the rupee by 133%. The rupee was further devalued in early 1980s during General Zia regime. Moeen Qureshi’s caretaker government in 1993 also devalued the rupee by 7%.

After that it was Benazir Bhutto’s government that further devalued the rupee and finally same measure are being taken by the present government of Prime Minister Mian Muhammad Nawaz Sharif.

Pakistan has been on a system of managed float since January 8, 1982. For most of the past decade the rupee had been fixed in relation to the US dollar at the rate of Rs 9.9= US$1. The new exchange regime commenced with an official nominal depreciation of 5 percent in the month of January, and a cumulative 30 % for the year 1982. This was accompanied by the abandonment of the fixed peg to the US dollar and its replacement by a flexible basket peg whereby the authorities manage the nominal exchange rate actively. The exchange rate system has remained unlettered up to the present and the Government has periodically re-affirmed its commitment to this flexible management in stabilization and adjustment programs negotiated with the IMF. Since the introduction of the new system there has been a continuous downward slide in our exchange rate. At present the rate of Pak RS in 2010. This represents a depreciation of 260 percent since

Devaluation and its function

Depreciation or devaluation refers to the downward movement of the rate at which the home currency exchanges against the foreign currency or an increase in the domestic price of one unit of the foreign currency. Depreciation is the name given to this drop when it occurs in a free market; devaluation is the same thing resulting from government actions in a market that is not free. Since 1973 most of the currencies are on the floating currency system, through the system of dirty floating still allows government/ central banks to interfere to some extent. The question of devaluing the external value of the currency is one of the hotly debated issues in public policy discussions. On the one hand, the IMF and the World Bank supports devaluation as an important component of their recommended policy package for less developed countries (LDC’s). On the other hand many economist and economic policy makers are strongly opposed to devaluing currencies has become a dirty word in many countries.

Technically, devaluation of a currency is the last resort when other fiscal and monetary measures like demand management , financial incentive, trade restrictio