Impact of Real Effective Exchange Rate on Trade Balance of Pakistan; A Dis-Aggregate Analysis

Abstract

The current study used a dis-aggregated model of exports and imports to empirically analyze its impact on the trade balance. The sole purpose of the dis-aggregate model is in-depth analysis as Pakistan since independence and especially during the current decade facing severe trade deficit due to high fluctuation in the exchange rate and an increasing trend in imports.  The export model revealed that overvaluation of the real effective exchange rate decreases the exports of Pakistan. However, the imports model revealed that devaluation or depreciation in the real effective exchange rate may further aggravate the cost of importing goods and thus lead to an increase in the trade deficit of Pakistan. From forecasting analysis, the study concluded that in future the imports will be further increases as shows an upward trend. In this regards the government should use appropriate economic policies for import substitution strategies to control the severe trade deficit of Pakistan.