Since May 1999, Pakistan has been following a market-based flexible exchange rate system.

Inter-bank
rate applies to all foreign exchange rate receipts and payments both in public and private sectors.
Exchange rate is determined by the demand and supply conditions in the domestic interbank foreign
exchange market. A country such as Pakistan in which the exchange value of currency fluctuates
frequently the stability of exchange rate is very important for economic growth and stability. There can
be favourable or unfavorable consequences of the fluctuations in the exchange rate on macroeconomic
variables of economy of a country depending upon the shared relationship. It can be effective if the
exchange rate is free- floating that it is fluctuating without any interference, but in Pakistan it is a
managed flexible exchange rate system, SBP interferes to stabilize the rupee in market.

However, fluctuations on interest rates have a great impact on the investors, as it says that higher
exchange rate volatility will reduce trade by creating uncertainty about future profit from export trade.
In the long run, exchange rate volatility may also affect trade indirectly by influencing firm’s investment
decision. It suggested that a positive relationship between stock prices and exchange rates exists when
local currency depreciates and local firms become more competitive which leads to an increase in their
exports. This will result in an ultimate increase in stock prices. Increasing and decreasing interest rate
also effects our imports and exports. In theoretical prospective the devaluation of home currency should
decrease the volume of imports, because it will cost more for Pakistan to import goods from other
countries.

The Devaluation occurs in terms of all other currencies, but it is best illustrated in the case of only one
other currency. Any rising of the prices of such inputs through devaluation, would raise industrial costs
and reduce the intensity of capacity utilization. It examines that currency devaluation has positioned
Pakistan lose heavily both as seller and as a buyer and has made no good substitute for remedial
changes in economic policies and developmental planning. In Pakistan, industries are heavily dependent
on imported raw materials for industrial goods and capital goods and components, and their access to
advanced countries is blocked by quotas and tariffs. , any rising of the prices of such inputs through
devaluation, would raise industrial costs and reduce the intensity of capacity utilization. So, by
examining devaluation in Pakistan it is concluded that it has always led us to the cost push inflation and
never ending cruel economic circle. There are so many solutions to resolve the currency devaluation as
appreciate the currency through Foreign Direct Investment, increase the export of goods in this situation
will lead to high cash inflows because there would be high demand push by the countries.

Devaluation decreases the prices of our exportable goods and simultaneously increases prices of goods
we are importing from abroad as well as increases domestic price level of goods and commodities, thus
reducing the purchasing power of the people of the country. It may create inflation in the country. Our
long experience has shown us that devaluation is not the proper remedy for economic growth of the
country. It has resulted in increasing our debt burden to the extent that nowadays it is not possible to
obtain easily any aid from world lending agencies. It may be realized that for whatever reason we
devalue our currency it results in manifestation of weakness of our economy to the other countries.
Further, excessive devaluation of the past has adversely affected our credit rating. Moreover foreign
investors are now more conscious or reluctant for making any investment in the country. Only logical
path available to us is to try to reduce the cost of production of our exportable goods and increase the
productivity of the goods, which will enable us to compete in the world market. Participation of
everyone concerned towards the above goal will make a difference, but we should do it now not later.