EXCHANGE RATE, J CURVE AND DEBT BURDEN OF PAKISTAN

The exchange rate is used as a policy variable to control the balance of trade. the famous j curve theory states that depreciation of local currency will make the foreign goods expensive for the locals and local goods cheaper for the foreigners, which implies that the imports will decrease and the exports will increase, causing improvement in balance of trade. however, this study and many earlier studies found no evidence for existence of j curve for pakistani trade data. the j curve theory will work only if the imports and exports are elastic enough to the movement of exchange rate. major portion of pakistani imports consists of necessities and shows no response to exchange rate movements. therefore, the currency depreciation will cause a rise in the value of imports as well as increase the amount of external debt measured in local currency. given the heavy amount of external debt payable, the currency depreciation will put heavy burden on economy of the country. therefore, the net result of currency depreciation is simultaneous increase in import bill and the debt burden. we recommend that policy of stabilizing the exchange rate should be adopted in order to protect the country against the increase in debt burden.