Impact of Exchange Rate Volatility on Pakistan’s Trade

Abstract

This study investigates the effects of exchange rate volatility on trade between Pakistan and its major trading partners on the basis of imports and exports. The import and export models are estimated by using the fixed effects econometric technique to assess the impact of exchange rate volatility on trade. The empirical findings indicate that the exchange rate volatility has a significant impact on exports to UK, Netherland and USA. Moreover, the exchange rate volatility has a significant impact on Pakistan’s imports from UK, USA and China. However, with other countries, this study reveals an insignificant impact of exchange rate volatility on trade. The positive impact of exchange rate on imports is disadvantageous for Pakistan, however, this can be inverted if the domestic market provides suitable substitutes that can compete with the essential imports. Also, higher import duties have to be imposed on non-essential products. In regard to the exchange rate volatility impact on trade, it can be concluded that the least or no impact of exchange rate volatility is possibly related to the rising availability of financial instruments that hedge against the exchange rate risk, besides the increasing share of intra-industry trade.