Effect of 1972 Devaluation on Pakistan's Balance of Trade

Abstract

In most of the developing economies, a rapid growth of G.N.P. invariably implies a larger import bill. Capital goods necessary for development have to be imported and a higher level of income in turn implies an increase in the import of consumption goods. On the other hand, demand for primary goods, which are main exports of developing countries, is inelastic. Moreover, the develop¬ing countries face serious problems in selling their manufactured products in the world market, partly due to their relatively inefficient industrial structure and partly due to the restrictive import policies of the developed countries. This results in a deficit in the balance of payments of many developing countries. To meet the deficit, import restrictions and export encouragement policies are followed instead of devaluation, which is resisted on both economic and non- economic grounds. This study has as its objective an analysis of the effects of the: devaluation of Pakistani rupee in May 1972, which changed the par value of Pakistan's rupee from Rs. 4.76 to Rs. 11.00 per U.S. dollar. Prior to the 1972 devaluation, imports were restricted through tariffs and quotas. In addition, certain pro¬ducts could be imported only under bonus and cash-cum-bonus lists. On the other hand, exports were encouraged through Export Bonus Scheme, Pay-As- You-Earn Scheme, and similar other incentives. These measures led to a multiple exchange rate regime. These measures may have had some beneficial effects in the short run but as Soligo and Stern [26] have shown over the long run, they led to a misallocation of resources. Pakistan devalued her currency in May 1972, as stated by the then Minister of Finance in his speech, to end the flow of foreign exchange abroad, stop over invoicing of imports and under invoicing of exports, correct the misallocation of resources, curb uneconomic import