Reference no: EM13188320

Among many macroeconomic problems of Pakistan, trade deficit is one of the major problems. The policy of devaluation of Pakistani rupee is usually adopted to reduce this trade deficit. Our currency depreciated from Rs. 24.84 per dollar to Rs. 85.59 per dollar between year 1991-92 and 2010-11, and it is now Rs. 90.1562. This depreciation of rupee was usually done to promote the exports and to reduce the imports. But this strategy is not so much successful and Pakistan's trade deficit still exists at very high level. Out of our major export items like cotton, rice, wheat, vegetables, fruits, fish, leather, surgical instruments, woolen carpets, jewellery, pharmaceuticals, cement, petroleum products etc, only cotton and cotton manufactures have remained at the top of the export list and fetched the highest dollar earnings during the last fiscal year 2010-11 and our export earnings reached to $25 billion. If we see the import side, our country heavily depends on the imports to meet its requirements of machinery, raw materials and oil. We depend on imports even for essential food items like soyabean, palm oil, baby food and pulses etc. Despite of agricultural country, we are still importers of food. Our import bill increased from $28 billion to $32 billion in the last fiscal year 2010-11due to the high food and oil prices. On the basis of this trend of imports and exports, our current account deficit for year 2012 has been estimated at 2.5% of the GDP.

Requirement:

Keep the above scenario into consideration; discuss why the policy of devaluation is not so much successful to improve the trade deficit conditions of Pakistan? In your opinion, what can be the possible ways to promote exports and discourage imports in order to have favorable terms of trade?