Study of the impact of Surging Energy Prices on exports of Pakistan

DETERMINANTS OF EXCHANGE RATE IN PAKISTAN (1971-2014)ABSTRACTThis article focused on the main determinants that affect the exchange rate movement in Pakistan. The study observed some key variables that are responsible for exchange rate volitality and analyze the importance of each variable. Annual data for the period of 1971 to 2014 is used. Data gathered from websites of State Bank of Pakistan, tradingeconomics.com, theglobaleconomy.com and IMF data of Pakistan. The key independent variables of this study includes GDP, interest rate, export, import, foreign exchange reserve, inflation rate and money supply that directly or indirectly affects exchange rates of Pakistan. Linear regression with coefficients and correlations applied to examine the results. The results indicate that GDP and export of Pakistan are the primary factors affecting the exchange rate of rupee against U.S. dollar. The third most important factor is inflation higher the rate of inflation lower will be the exchange rate. Foreign exchange reserve, interest rate, import and money supply are not significantly related to exchange rate of Pakistani rupee. Based on the results it is recommended that export activities should be increased in Pakistan and monetary and fiscal polices should be made more efficient to reduce inflation and strengthen economic growth.Key words:Exchange rate volatility, gross domestic product, inflation, export, linear regression, coefficient, correlation

ACKNOWLEDGMENTFirst, I want to thank Almighty Allah for giving me a chance to prove myself. I would like to express my gratitude towards my parents and my supervisor for their kind co-operation and guidance as well as for providing me necessary information from time to time regarding the research. Precious support from my family and friend enable me to complete this research.

ContentsABSTRACTiiiCERTIFICATEivDEDICATED TOvACKNOWLEDGMENTviLIST OF TABLESviiiLIST OF FIGURESixLIST OF ABBREVIATIONSxINTRODUCTION11.1Background of the Study:21.2Statement of Problem31.3Justification31.4Purpose of the Study41.4.1General Purpose41.4.2Specific Purpose41.5Basic Assumptions51.6Definition of Key Terms51.7Scope51.8Limitations51.9Hypotheses6LITERATURE REVIEW7RESEARCH METHODOLOGY153.1Design Strategies163.2Population173.3Sample173.4Research Tools and Techniques183.5Validity203.6Reliability21DATA ANALYSIS AND DISCUSSION224.1 Anlysis of dependent variable..234.1.1 Exchange rate in Pakistan..234.2 Analysis of independent variables..................................................244.2.1GDP growth rate in Pakistan...244.2.2 Inflation rate in Pakistan.............................25 4.2.3 Interest rate in Pakistan...274.2.4 Export in Pakistan..284.2.5 Import in Pakistan..304.2.6Annual growth of money supply in Pakistan.....314.2.7 Foreign exchange reserves of Pakistan.32SUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATIONS395.1Summary405.2Findings415.3Conclusion415.4Recommendations42References43APPENDIX A45APPENDIX B46

LIST OF TABLESTable 1: Model summary 38Table 2: ANOVA 38Table 3: Coefficient of determination 40 Table 4: Correlation 41

LIST OFFIGURES

Figure 1: GDP in rupees per U.S. dollar 6Figure 2: Pakiatani rupee exchange rate against 1 U.S. dollar.. 27Figure 3: Pakistan GDP millions of U.S.dollar.. 29Figure 4: Pakistan inflation rate in percentage................................................................ 30Figure 5: Pakistan interest rate 32Figure 6:Pakiatan exports in PKR million. 33Figure 7:Pakiatan imports in PKR million.. 34Figure 8: Annual growth in money supply (M2) in percentage 35Figure 9: Pakiatan foreign exchange reserves in billions of U.S. dollars 36

LIST OF ABBREVIATIONSSBP State Bank of PakistanGDP Gross domestic productFDI Foreign Direct InvestmentFER Foreign Exchange Reserves

46

CHAPTER-ONEINTRODUCTION

1. Introduction1.1 Background of the Study:Every country has its own financial market and it is the base of every nations economy. Financial markets include foreign exchange markets, interest rate markets, import and export markets etc. Exchange rate plays an important part in the international trade and finance because it is the most watched and monitored measure of economy. State Bank of Pakistan (SBP) is the central authority that is responsible for the issuance of currency all over Pakistan. Before 1971,Pakistani rupeewas connected with Pound sterling but in 1971, it was linked with US Dollar because of the rapid increase in demand of Dollar in Pakistan. In 1982, Pakistan was fallen into a budget deficit so Pakistan decided to adopt a managed floating exchange rate system because this system was helpful in decreasing the gap between official rates and market rates during this period Pakistani rupee delinked from U.S dollar. During managed floating exchange rate system, central bank becomes main player because they hold stock of foreign currency.In 1998, to minimize the financial crisis Pakistan adopted multiple exchange rate system to solve the problem of trade deficit and to increase the efficiency of Pakistani rupee.The economy recovered from the crisis in 1999, and it was decided to peg the currency with US dollar again. In 2000, the State Bank of Pakistan applied a market based exchange rate system.During 2007 to 2008, Pakistani rupee devalued against US Dollar by about 23% due to the increased import activities, political instability and current account deficit. There is a floating exchange rate system practiced in Pakistan since then and this system may lead the country to suffer from economic instability and high risk of crisis if the economy faces high inflation. Pakistani rupee is continuously declining against US Dollar. In 1982, the exchange rate between the two currencies was Rs.10.39, which increased to Rs. 85.75 in the year 2010. Currently one US Dollar is equal to 101.9 Pakistani rupees, which shows that the government and central bank is unable to control exchange rates. As the Pakistani rupee is devaluing so, it is very important to determine those factors that are affecting the exchange rate of Pakistani rupee.(Salim Chishti, 1993)During 2011-2012 Pakistani, currency was under pressure because of the decline in the external account of the country and due to large amount of payment of IMF loans. The main factors or independent variablesof this study are inflation, interest rate, money supply, import, export, GDP growth rate and foreign exchange reserves, whichdirectly or indirectly affect the exchange rate (dependent variable) movement in Pakistan.One of the essential reasons of continuous devaluing of currency in exchange rate is deficit GDP. There exist a positive relationship between GDP growth rate and the level of exchange rate. Growth ratein early 70s were 4.8%, which expended to 6.5% in 1980s but the growth rate fell to 6.4% in 1990s and currently the growth rate is 4.14%. When GDP increases the demand for goods and services increases, which would be beneficial for both importers and exporters.The influence of GDP is high on exchange rate accompanied by other variables such as inflation rate, interest rate,import and export. Exchange rate volatility decreases export activities within a country. If for instance an an individual invests into US Dollars and the exchange rate changes, strikingly between the times you buy and the time you plan to sale it might be conceivable that the positive return will transform into a negative one.1.2 Statement of ProblemExchange rate is the most important component that directly affects the economic growth of a country. In the current economic condition, it is very important to look into those factors that are directly responsible for the devaluation of the currency. Determining the factors that positively or negatively affect the exchange rate is the main research question andissues related to the factors negatively affecting exchange rate needs to be answered.1.3 JustificationThereason behind conducting this research is to find out appropriate purpose of why Pakistani rupee is continuously depreciating so it is very necessary to take into account those key factors that are affecting the exchange rate of Pakistan.Because exchange rate is very important for any country as they determine the level of import and export and directly associated with the economic growth of a country. If Pakistan has a strong currency so, its goods become more expensive in the international market, whichwill result in competitive strength.

Figure No.:1 GDP in rupees per U.S. dollar

1.4 Purpose of the Study1.4.1 General PurposeThe purpose of this study is to identify the main determinants of exchange rate in Pakistan and to analyze the strong impact of all independent variables on dependent variable that is exchange rate.1.4.2 Specific PurposeTo investigate either economic growth affects exchange rate positively or negatively.To analyze all the important factors and detect which of these factors are significantly affecting the exchange rate of Pakistani rupee.To study the influence of interest rate and inflation on the exchange rate of Pakistan.To take into account the foreign exchange reserve affect on the Pakistani developing economy.1.5 Basic AssumptionsIt is anticipated that exchange rate volatility and all the variables taken into account have a deep and strong relationship with each other and these variables play a very important role in the international market. 1.6 Definition of Key TermsExchange rate: A rate at which one currency is traded for another.Multiple exchange rate system: A system where a country will have both fixed and floating foreign exchange rates at the meam time and both can be utilized when tradinging currencies in that country.Sterling: Excellent or outstandingVolatility: UnpredictabilityGDP: Total market value of the final goods and services produced within a country during a particular year.1.7 ScopeThis study is beneficial as it investigates the effect of independent variables on dependent variable that is exchange rate movement in Pakistan from 1971 to 2014. This research is helpful in recognizing the main causes of devaluation of currency against U.S Dollar.1.8 LimitationsThe study is limited only to the financial sector of KSE 100. There are some basic variables, whichare considered to be of utmost importance however, there may be many other determinants, which are not taken into consideration but have strong influence on the study.1.9 HypothesesH0: Inflation is significantly related to exchange rate.H1: Inflation is not significantly related to exchange rate.H0: Interest rate is significantly associated with exchange rate.H1: Interest rate is not significantly associated with exchange rate.H0: Import activityis significantly related to exchange rate of Pakistan. H1: Import activity not significantly related to exchange rate of Pakistan.

CHAPTER-TWOLITERATURE REVIEW

Literature ReviewThis section discussed scholarly theoretical and empirical literatures, which are important in consideration to the research topic as it will be helpful in understanding the inputs, which have been used, and to determine the gap that needed to be closed through this study. Another important purpose of writing literature review is to have necessary knowledge regarding the topic under study. These articles will behelpful in conducting further research.The articles reviewed used many different variables and various test were conducted to find an appropriate conclusion in every research. Every study has some link with the previous study. The test used was regression, unit-root test, co-integration, correlation and error correction strategy. The time period of every study vary greatly. The articles taken into account belong to different economies but the dependent variable of every article was same that is exchange rate except the study of Atiq-ur-Rehman where exchange rate is used as an independent variable. Some authors like Yan Li and Zakaria have compared the exchange rate of many countries together. All studies were secondary in nature and used many different sources to obtain data.Razi used in his study several variables out of which many of the independent variables are positively as well as negatively related to exchange rate movement. Farrukh in addition just focused on real exchange rate as an important component of economic growth. Shabana in her study has mainly considered two key variables that have strong impact on exchange rate of Pakistan but the duration of her research vary greatly as compared to previous articles reviewed. Saeed made efforts to find out the determinants affecting exchange rates but only in long run. Zahoorlooked on other variables such as reserve money and manufacturing products responsible for exchange rate predictability. Iqbal in connection with the above mentioned reviews have focused mainly on macro economic variables. Muhammad conducted the same research as Razi but used unconventional approach.Salim made further modifications by stating that there is a negative relationship between vitality of exchange rate and foreign trade. Lious and Anita have also studied macro economic variables but of Nigerian and Indian economies. Imran and Hassan have discussed inflation in detail in accordance with the unpredictable exchange rates. Taylor discussed relationship of foreign exchange markets and exchange rate volatility by keeping in view key macro economic variables.

Raziet. Al.in their study presented exchange rate volatility and recommended that exchange rate has greater impact on profitability of businesses if they have foreign direct investment. Main determinants used in their study include interest rate, inflation, current account deficit and public debt. This article further discussed how independent variables affect the exchange rate and what changes take place in overall economy of Pakistan. Data collected by using secondary sources. Data collected for the period of 2001 to 2011 with 10 numbers of total observations. The research used multiple regression equation in order to analyze the relationship between exchange rate represented by Y ( dependent variable) and the interest rate, inflation rate, current account and GDP represented by X ( independent variable). The result of this researchsummarize as independent variables deeply related with dependent variable. It showed that exchange rate change with the changes in economic factors. Analysis showed that independent variables have positive and negative relation with exchange rate and havingstrong correlation coefficient and coefficient of determination.Therefore, this model wasoverall significant. (Amir Razi, 2012)Based on the first literature review this article is consideredbecause it includes more variables that cause exchange rate volatility. Furrukh Bashir et. Al. analyzed that real exchange rate is an important component in the growth of the economy as it may increase export and decrease import activities in the country. As first study only focused regression, so in addition this study used co-integration, error correction model, unit root test and VAR lag order. This study aimed to examine the determinants of exchange rate in Pakistan. Data was collected from 1972 1973 to 2012 2013. The study concluded that real exchange rate depreciates against trade deficit and Price level. Trade restrictions and workers remittances inversely related to exchange rate of Pakistan.(Luqman, 2014)This literature has covered a broad period starting from 1975-2010 but study focused on inflation and growth rate only. ShabanaParveenet. Al. studiedthat equilibrium in exchange rate is determined when demand and supply of foreign currency vary. As the demand increase or decrease for any currency, it obtains the clearing price for that currency.The stationarity of data was determined, by using Augmented Dickey-Fuller test. Akaike Information Criterion and a linear regression model were also used. Stationary of the Variables were checked first by using intercept and then an intercept and a linear deterministic trend was included. The study concluded that inflation and growth rate have a negative relation with exchange rate. (Shabana parveen, 2012)Ahmed Saeedet. Al.obtained data from January 1982 to April 2010 to examine the behavior of Pakistani rupee with respect to USA exchange rate by applying error correction mechanism and autoregressive distributive lag approach to estimate the long run relationship between exchange rate and explanatory variables.Exchange rate has strong effect on price, wages, interest rate, production level, and employment opportunity. One way to determine exchange rate is that the demand for and supply of currencies with flow concept determines the equilibrium value of currencies. The other is the equilibrium value of financial assets determines the behavior of exchange rate. It was concluded that money stock, foreign exchange reserves and debt PKR/USD in relative terms are critical determinants of exchange rate between Pakistani rupee and U.S dollar. According to this study fiscal and monetary policy in addition with political stability were required to maintain the exchange rate stability in Pakistan. (Ahmed Saeed, 2012)Atiq-ur-Rehmanet. Al. considered exchange rate here as a variable that directly controls the balance of trade in a country. The variables he used in his study were exchange rate, export and import. Data obtained from World Development Indicators (WDI) 2010 database. JS curve theory was used to find out appropriate results. Results of Pak currency depreciation increase debt burden so it was recommended to apply such policies that stabilize exchange rate movement to avoid debt burden.(Atiq UR rehman, 2012)ZahoorHussainJavedet. Al.collected data from 1982 to 2007 and investigated the relationship between economic growth and exchange rate unpredictability in Pakistan. Economy growth, exchange rate, imports, exports, manufacturing products (MP) and reserve money are the main variables used in the study. This study has focused on the economic problem faced bydeveloping countries due to unpredictable exchange rates. Error collection mechanism and autoregressive lag model were used and it was found that an empirical relationship exist between economic growth and exchange rate unpredictability. Co-integration relationship between all variabeswas found in long run except import and export.The result was that the domestic economic performance was exceptionally touchy to uncertain exchange rate in the long -run period.(Zahoor Hussain Javed, 2009)IqbalMahmoodet. Al.stated that exchange rate directly affects the macroeconomic variables of the country and it further discussed that whether changes in exchange rate influence the macro economic variables in Pakistan. Data was collected from 1975 to 2005 with a series of 31 observations. This study was conducted in order to determine whether the uncertainty of exchange rate affect the macroeconomic variables or not. Autoregressive model was used to determine the stationary levels of all variables. GDP, FDI, trade openness and growth rates were the independent variables which directly affects the dependent variable that is exchange rate. The result of this paper shed light on the fact that exchange rate has a great impact on macroeconomic variables in Pakistan and exchange rate volatility has positive effects on GDP, growth rate and trade openness but has an adverse relationship with FDI.(Iqbal Mahmood, 2011)Mohammad Ahmed conducted his study on determinants of the exchange rate in Pakistan since 1982 by using unconventional approach. It investigated the important factors, which encourage the SBP to announce changes in the rupee. Error correction model and auto regression technique were used. In integration and co-integration,vector auto regression techniques have been used. Concluding that in the short run one must do discretionary management of Pakistani rupee with the movement of dollar and in long run relative inflation should be redeemed. Under suitable condition, the burden of adjustment and recession may occur in Pakistani export sector.(Ahmed, 1992)Yan Li et. Al. conducted study to determine reappraisal of exchange rate both in tradable and non-tradable products. The qualitative and quantitative implications were evaluated under adaptable costs. Data collected from 1985 to 2005 for six countries namely Canada, Denmark, Japan, Sweden, United Kingdom and United States with 20 total number of observations. The panel dynamic OLS regression was applied to liquidity-exchange rate model. Government, household and goods market are used as independent variables. The findings concluded that co-integration relationship exist between macroeconomic factors and nominal exchange rates which was analyzed by consolidating a symmetric two nation model with the restricted support of tradable and non-tradable merchandise.(Yan Li, 2010)SalimChishti and M.A YnulHasan stated this paper to take into account relevant variables that affect exchange rate. Co integration and error correction technique was used along with VAR model. The variables used were real exchange rate, nominal exchange rate, wholesale price index for US, consumer price index for Pakistan, excess supply of domestic credit, real gross domestic product, ratio of government deficit, terms of trade, tariff revenues and capital inflows. The overallresponse of the exchange rate to changes in variables are consistent with theoretical predictions. The result is that the variety of these real and monetary influences indicates flexible discretionary managed policy.(Salim Chishti, 1993)LouisKuijspresents a macroeconomic condition of Nigerian economy by using data from 1983 to 1997. The paper discussed estimated long run relationship of markets of money, foreign exchange and output. Dynamic equations were used for price level, real exchange rate and output. The three important variables used were inflation, exchange rate and output. The results were instrumental in explaining the role of the foreign exchange market and depreciation of exchange rate since 1985 and the effect of inflation during 1991-97.(Kuijs, 1998)Muhammad Zakariaet. Al. examines the role of variables that determines nominal exchange rates in Pakistan. Quarterly data collected for the period of 1983 to 2004 for 12 major countries namely Australia, France, Germany, Italy, Japan, Kuwait, Korea, Malaysia, Singapore, Switzerland, the United Kingdom and the United States. Generalized Methods of Moments (GMM) estimation was used. The correlations coefficients were highly positively correlated. The result showed that nominal exchange rates depend on a number of variables both in local and foreign economy. Specially policy-induced shocks were shown to be the cause of instability in nominal exchange rates.(Muhammad Zakaria, 2007)Imran Sharif Chaudhryet. Al. studied empirical relationships between foreign exchange reserves and inflation in Pakistan for the period of 1960 to 2007 with 48 total observations. This study analyzed the impact of foreign exchange reserves on inflation rate in Pakistan. The Auto Regressive Distributive Lag Model was used to estimate the order of co-integration between inflation and foreign exchange reserves. The result indicated that any short fall in foreign exchange reserves in Pakistan undoubtedly has some adverse effects on cost of goods and services, but it may not be as strong as predicted.(Imran Sharif Chaudhry, 2011)Hassan Al-Hajhojet. Al. investigated the determinants or the real exchange rate of the Gulf Cooperation Council (GCC) countries as a prerequisite. Standard Augmented Dickey-Fuller (ADF) unit root test and Eagle Granger two step co-integration technique were applied to determine the appropriateness of model using the VEC for each GCC country. The study results indicated that the estimated error correction coefficients were not significant for all the GCC countries. The study highlighted determinants of RER that are helpful to establish monetary union in the GCC countries.(Hassan Al. Hajhoj, 2014)RudigerDornbusch (1976) discussed the study of exchange rate movements. The purpose was to develop a theory that is suggestive that such exchange rate movements are consistent with rational expectations formation. Data of a small country that faced inflation is discussed here. Variables used were capital mobility, money market, goods market and equilibrium exchange rates were used. The magnitude and persistence of overshooting were used. The result suggested that the fixed output adjustment was suitable in short run. In the intermediate run, the present analysis gains relevance, because it would expect an adjustment of both output and prices in response to increased demand.(Dornbusch, 1976)Marialuz and Alex focuses on the case of Brazil. Data collected for the period 1983 to 2011 using a sample of 28 emerging markets it estimated a dynamic model of the real exchange rate. The five determinants used were namely Relative GDP per capita (GDPPC), Balance of goods and services (TB), Structural balance (SB), Relative public consumption (PC) and Relative public investment (PI). Result suggested that a permanent fiscal adjustment may reduce countrys appreciation pressure over the long term, maintaining fiscal policy by increasing public investment in Brazil this will help to reduce appreciation pressures and help dealing with budget deficit.(Marialuz Morene Badia, 2014)Anita Mirchandanidescribed macroeconomic variables and their relationships with exchange rate. Data collected for the period of 1991 to 2010 of Indian economy. The variables used were interest rate, Balance of trade, Inflation rate, Foreign Direct Investment, GDP etc which were directly related to exchange rate volatility. It is concluded that Indian Rupee has shown high volatility in few years because of the independent variables. Rupee depreciation was one outcome. In present condition without having stable source of capital inflow, the Rupee is expected to remain significantly volatile.(Mirchandani, 2013)Abdul Rashid and Mashael investigated the effects of 2008 financial crisis on exchange rate determination in PPP-UIP. Data collected for the period 1981 to 2012. Augmented Dickey-Fuller unit root test and panel unit root test, namely Fisher-type tests were applied. The results suggested that the recent financial crisis changed the role of exchange rate determinants. The results were different in all the economies. The findings were best for policy makers in designing effective policies to reduce the affects of financial crisis on exchange rates.(Abdul Rashid, 2013)Mark P. Taylordiscussed relationship of foreign exchange market and the exchange rate volatility. Selective survey was done to obtain data to further carryon research. This article used flexible price monetary model, sticky price and overshooting monetary model to determine exchange rate movement in long-run as well as in short-run. Equilibrium and liquidity models, portfolio balance method and empirical evidence on exchange rate models were also used. The result suggested that in short-run exchange rate movements were based primarily on macroeconomic fundamentals was not proved to be successful. (Taylor, 1995)

CHAPTER-THREERESEARCH METHODOLOGY

Research MethodologyResearch design is a composed approach to fulfill exploration prepare in a way wanted to settle the examination issues and to expand bits of knowledge.(Babbie, 2002) Research design is the foundation that depicts the methods for gathering and examining information. (Mc Millan, 2001)3.1Design StrategiesThe type of study conducted is causal in nature.Causal study is an examination study directed to build cause and influence connections between variables. (Uma Sekaran, 2012) The study is causal in nature as it explores the effect of key independent variables on the dependent variable that is exchange rate. The causal study is helpful to show a direct relationship between variables. The key independent variables of this study are inflation rate, GDP growth rate, interest rate, export, import, annual growth in money supply and foreign exchange reserve. All these variables are having a direct relationship with exchange rate.The type of research with respect to the data is quantitative. Quantitative information utilization test procedures whose discoveries are communicated numerically or scientifically that help the analyst to assess future amounts.(Mark Saunders, 2007) Quantitative data used in order to calculate regression, correlation and co-integration. Quantitative data is more appropriate than qualitative data as it tries to assess the issue and perceive how universal it is by searching for predictable result in a larger population.To examine the behavior of Pakistani rupee against U.S. dollar annual time series data used because this study is dealing with different measures of unpredictable exchange rate. A time series data consists of periodic arrangement of observations on one or more variables overtime. (Asteriou, 2006)The data of many years taken into account so that it may become easy to notice the reasons of continuous devaluing of Pakistani rupee for this purpose yearly data of forty-four years is considered. Time series is important for understanding past behavior of the variables that are directly or indirectly affecting dependent variable. Time series data denoted by symbol t if for example X represent exchange rate of a country from 1971 to 2014 so it is represented as: Xt for t =1,2,3,4,,TWhere t=1 for 1971and t=T=44 for 2014This study used secondary sources to gather data for research. Secondary data is the data, which the researcher did not collect directly from respondents or subjects. Some other researcher or institutions whose job is to gather data may collect it. (Greener, 2008)Second hand information that is assembled in this study by inspecting different documents from different public sources listed as follows: Journals Articles Books MagazinesData gathered from websites of State Bank of Pakistansbp.org.pk, IMF data of Pakistan,tradingeconomics.com, theglobaleconomy.com and world economic outlook as these resources have the most appropriate data needed to carryon this study. Secondary sources to assemble information used here because the data is readily available, very economical, can be observed over longer period and it is inexpensive to obtain data from internet by searching different reliable websites.3.2 PopulationThe destined population for this on hand study used annual data of sixty-seven years that is from 1947 to 2014 so that the study may be able to explore the reasons of continuous currency depreciation against U.S dollar.3.3 SampleFor this research study, the effects of determinants on exchange rate of Pakistani rupee against U.S dollar over the period of forty-four years (1971-2014) with 44 total observations are considered. Out of sixty-seven (67) total number of population a sample of forty-four(44) numbers of total observations are taken in this study so that it can point out the main causes of devaluation of Pakistani rupee. These large numbers of observation will be helpful to easily find out key variables that are affecting exchange rate of Pakistan over a period of time.3.4 Research Tools and TechniquesIn order to carryon, this research many tools such as MS word, internet,googledoaj, SPSS software to run regression and correlationwere used to view different literatures and collection of data for analysis.Excel sheet was also used to make graphs related to the study. Regression and correlation as the statistical tools or techniques used in this research because regression is helpful in measuring the relationship and strength between value of one variable and corresponding value of other variables.On the other hand, correlation is beneficial in establishing a connection between two or more variables. Excel sheet is used to make graphs with exponential trend line to explain the movements of key independent variables against dependent variable.The trend line might be declining for some variables and increasing in case of other variables depending on the tendency of exchange rate volatility. In order to analyze the variables that are directly affecting the exchange rate of Pakistan a regression model is used. The following is the main regression equation, whichis used to carry on further analysis:Y= + 1GDP + 2INF + 3I + 4X + 5IMP + 6F.E.R + 7M.S + Where, Y = exchange rate (dependent variable)GDP = gross domestic productINF = inflationI = interest rateX = exportIMP = importF.E.R = foreign exchange reserveM.S = money supply = residual term

Theoretical Framework

3.5 ValidityValidity is a measure that the instrument, technique or process used to measure a concept does certainly measure the planned concept. (Uma Sekaran, 2012)Validity implies whether the findings are truly about what they seems to be, to verify that examination result are effective and helpful, approval of the amazing significance. (Robson, 2002)In case of this study, the aim is to analyze the sensitivity of determinants to the unpredictable exchange rate movements. Validity must be tested first to make sure that the variables measure what they aimed to measure. Changes in exchange rate represent the exchange rate movement. There is a causal relationship between all key independent variables and exchange rate. This research will satisfy validity because the methods used here are scientific and reasonable. 90% confidence level is estimated which means that there may be 10% chances of error.The confidence level is otherwise called level of significance.3.6 ReliabilityReliability shows the extent to which it is error free and guarantees consistent estimation across time and various things in the instrument. (Uma Sekaran, 2012)Reliability refers to the extent to which data collection techniques or analysis technique will yield unchanged findings. (Robson, 2002)Consistency refers to the term reliability. The data obtained from various sources is trustworthy. It is assumed that the result obtained is consistent with the prior studies. The data collection techniques and analysis procedure is free from any type of error and biasness.

CHAPTER-FOURDATA ANALYSIS AND DISCUSSION

Data Analysis and DiscussionMany variables have a direct or indirect affect on the exchange rate of Pakistani rupee against U.S. dollar. The variables used in the analysis include exchange rate, GDP growth rate, export, import, annual growth in money supply, inflation, interest rate andforeign exchange reserve.4.1 Analysis of dependent variable:4.1.1 Exchange Rate in Pakistan:All the countries in the world have many different currencies, with distinct values so when trade takes place between countries for this purpose exchange system was invented. Exchange rate is a rate at which one currency is exchange for another. It is the dependent variable of this study. State Bank of Pakistan is continuously trying to manage the exchange rate of Pakistani rupee against U.S. dollar but still the currency is subject to unpredictable capital outflows. Since the existence of Pakistan on the map of world there are different exchange rate policies practiced in Pakistan. These policies include flexible floating, managed floating and fixed exchange rate. This study is mainly conducted to look into those factors that are responsible for the devaluation of Pakistani rupee against U.S. dollar. Exchange rate remains stable during the year 1973 to 1981. The depreciation of currency may be caused by demand and supply factors. Some times little devaluation of currency could be beneficial for the country as it increases exports on the other hand, it increases liability and foreign loan payments.The factors considered are directly or indirectly related to exchange rate. These factors creates hurdles in exchange rate stability. The graph shows variation in exchange rate these variations increases during greatly during the period of 1971 to 2014. The exchange rate was at a height of Rs.104 in 2014 and recorded lowest at Rs.8.6 in the year 1972.

Figure No. 2: Pakistani rupee exchange rate against U.S. dollar 4.2 Analysis of independent variables:4.2.1 GDP Growth Rate in Pakistan:GDP is the total market value of all the final goods and services produced within a country during a particular period. Pakistan is a developing country and its economy is the 27th largest economy of the world in term of purchases.The main reasons in decline of GDP includes illiteracy,corruption, unemployment, lack of foreign investment, low level of productivity, political instability and law and order situation in the country. With the increasing GDP, the demand for goods will also increase as it is estimated that GDP is positively related to exchange rate volatility. If the growth rate is high it would be beneficial for both the importers and exporters because they can enjoy maximum benefits with the increased growth rate.Pakistan is one of the least developed countries in Asia. It has a semi-industrialized economy that relies mostly on agriculture, manufacturing and remittances. Pakistani economy incorporates multiple essential elements such as traditional farming in village areas as well as modern agriculture, advance commercial enterprises, handicrafts and a huge number of administrative services. Services or simply the trade sector are the real source of financial development representing a large portion of Pakistans aggregate national income with around 33% workers employed in this division. The development in industrial sector specifies that it has shown a substantial growth in contrast with other two sectors with the passage of time.The gross domestic product (GDP) in Pakistan expended 4.14 percent in 2014. The GDP growth rate in Pakistan averaged 4.92 percent from 1952 to 2014, reaching on a height of 10.22 % in the year 1954 and the lowest record was of -1.8% in 1952. Although since 2005 has been growing at an average 5% per year but it is not enough to keep up with the fast growing population. The Pakistan Bureau of Statistics reports GDP growth rate in Pakistan. Figure No. 3: Pakistan GDP rate in current U.S. dollar

[Source: www.tradingeconomics.com]

4.2.2 Inflation Rate in Pakistan:Inflation rate is the percentage rate of change of price index overtime. Inflation is the state in which the value of money is falling and the prices are rising. (Crowther, 2011) Inflation leads to uncertainty about the future purchasing power of money, which ultimately results in decreased savings and investments. This also increases imports while discouraging exports that lead to trade deficit in a country. In Pakistan, inflation is mainly caused by declining economic growth, high tax rates and continuous depreciation in the value of rupee. Due to inflation purchasing power decreases, it is not good for retired and poor people as they receive a fixed amount of money so the spending power remains decreasing each month because these people hold less number of tangible assets and equities and mostly keep their investment in the form of cash or deposits, which ultimately looses value during inflation. Store of value is the function of money, which is also,weakens through adverse affect of inflation in Pakistan. Inflation is of utmost importance to the policy makers.The countries having a higher inflation rate usually faces devaluation of their currency in connection with the currencies of their tradind partners. Inflation usually accompanied by higher interest rates.The figure illustrates the exponential trend of inflation in Pakistan. In late 1970s and 1990s, there was a double-digit inflation in Pakistan. Late 1970s was the most unstable period of inflationary uncertainty for Pakistan. The inflation rate in Pakistan reach on a height of 37.14 % during the period 1973 to 1975 and the lowest record was in 2001 to 2002 of just 3%. The period of 1973 to 1975 is the supposed to be the worst episode in the inflationary history of Pakistan and the main cause of high inflation during this period was hike in oil prices and poor agricultural production. A firm monetary policy along with fiscal integration contributed a lot in low inflation during 2000 to 2003 as this period has a broad money growth in agriculture, industrial and trading or servicing sectors.Figure No. 4: Pakistan inflation rate in percentage [Source: www.tradingeconomics.com]4.2.3 Interest Rate in Pakistan:Interest rates are the rent paid by a borrower (debtor) to a lender (creditor) for the use of moneyover time, and they are express in percentage terms per annum. (Faure, 2011). This study focused on lending interest rate of Pakistan.Interest rate is one of the most important factors that affect the exchange rate movement. Interest rate is helpful for the State Bank of Pakistan to reach its inflation target. Inflation and interest rates are inversely propotional to eachother. When the interest rate is high, it leads to low inflationand vice versa. Currencies that have a high interest rate draw attention of many investors to seek the top most opportunities for their investment. This is helpful in increasing the demand of currency. Lower interest rate leads to decrease in exchange rate. In Pakistan, the State Bank of Pakistan takes interest rate decisions. The official interest rate is the discount rate or the market repurchase rate. (Mirchandani, 2013) Interest rate in Pakistan averaged 12.45 percent from 1972 to 2014reaching at the height of 20% in 1996 and recorded lowest at 7.5% in 2002. It was stable during 2002 to 2004.Figure No. 5: Pakistan lending interest rates in percentage

[Source: www.tradingeconomics.com]4.2.4 Export in Pakistan:The products or goods manufacturednationally and traded internationally are known as export. Export encourages people to exchange things worldwide firstly this was done by using barter system.But after the invention of currencies it takes place through exchange rate.Like GDP, inflation and interest rate export is also an important determinant of exchange rate because increase in export activities result in higher exchange rate but currency with low exchange rate results in lower exports. It means there is a positive relationship between export and the exchange rate because when the export activity increases in a country its exchange rate becomes more stable. Due to advance technology, many of large firms have winded their business and went abroad only a few popular branded companies are left here.So, the export base of Pakistan is not as strong as before but government of Pakistan is consistently making efforts to increase export activity. Export is helpful in increasing revenue of a country. It is useful in balancing growth and is advantageous in gaining new knowledge and experience. On the other hand, export may include unbearable costs and the exporters may face rejection of products due to unfavorable political risk. Pakistans major exports includesraw cotton, lather and products made up of leather, carpets rugs and tents, synthetic textiles, surgical instruments, sports goods, readymade garments, engineering products, chemical and pharmaceutical products, vegetables fruits and fish, mineral feuls, manufactured goods, beverages and tobacco. Pakistani mangoes are the most delighted items that traded in massive amounts to numerous countries abroad. United States, China, U.A.E and Saudi Arabia are the primary export partners of Pakistan. The large part of export earnings originates from textile sector. Water scarcity particularly for agri-use and power shortage especially in Southern Punjab is another drawback of Pakistani export. Pakistan has a higher export rate with United States that is 13.6%. Export in Pakistan averaged 34120.04 million PKR from 1972 to 2014 reaching at the height of 275433 million PKR in 2013 and recorded minimal at 830.4 million PKR in 1976. The figure shows a continuous increase in export, which is good for Pakistan because the value of Pakistani currency also increases with the increase in export.

Figure No. 6:Pakistan exportsin PKR million[Source: www.tradingeconomics.com]4.2.5Import in Pakistan:When the goodsnot produced nationally or produce in very less quantity so the goods bought from abroad, it is termed as imported goods. Many countries have to import goods because they either cannot produce it locally or cannot create enough of it to meet its demand. Import is helpfulas it reduce reliance on the domestic markets and helps in creating competitiveness among rival firms in local market. On the other hand, imported items increases the risk of getting dangerous deseases like aids etcfrom the exporting country, it could increase the possibility of excessive competition, and the imported goods may be defective to some extent.The government of Pakistan controls imports activities in Pakistan. The main imports of Pakistan are mineral fuels, animal and vegetable oils, crude materials, chemicals and machinery. The importer must have to make payment in the currency of the exporting country.China, United Arab Emirates, Saudi Arabia, United States and Kuwait are the primary import partners of Pakistan. Import in Pakistan averaged 57741.29 PKR million from the year 1971 to 2014 reaching at a height of 472228 PKR million in 2014 and was recorded lowest of 228 PKR in 1971.Figure No. 7: Pakistan imports in PKR million[Source: www.tradingeconomics.com]4.2.6 Annual Growth of Money Supply in Pakistan:Money supply is definedas the aggregate sum of money that is currently circulated in a country.Circulation of money is being controlled by the central banks.Monetory policy controls money supply in an economy through change in interest rate and after every three months State Bank announces a new monetary policy. It is necessary to control money supply because its increase will cause inflation. Purchase leads to increase in money supply and sales leads to decrease in money supply. There are some measures of money supply includes M0, M1, M2, M3 and M4. M0 includes coins and notes in circulation that are easily convertible into cash. M1 includes most liquid assets such as currency, travelers check, demand deposits and other checkable deposits. M2 adds to M1 other assets that are not so liquid and includes small domination time deposits, saving deposits, money market deposit accounts, and money market mutual funds. M2 is considered asthe more advance form of money. M3 in addition to M2 also includes long-term mutual funds. M4 also includes gold and land and are highly less liquid assets. This study focused on M2 as it has greater impact on exchange rate. Money supply has shown a substantial amount of decline during several periods. Money supply in Pakistan reached at a height 29.3% in the year 1993 and recorded lowest in the year 1975 1.2% (in negative). Figure No. 8: Annual growth in money supply (M2) in percentage

[Source: www.theglobaleconomy.com]4.2.7 Foreign Exchange Reserves of Pakistan:Foreign exchange reserve is the financial assets held by the State bank of Pakistan that have various currencies, which are used to pay back its credits over time. The primary center of this study is on U.S. dollar. Foreign exchange reserve was a single digittill the year 2000 but as the debt burden increases the State Bank of Pakistan has to increase the holding of its economic resources. Foreign exchange reserve of Pakistan reached at a height of 17.70 in the year 2013 and recorded lowest in the year 1971.Figure No. 9: Foreign exchange reserves in billions of U.S. dollars

[Source: www.theglobaleconomy.com]After explaining and analyzing all the variables and keeping in view the data and graphs of all the key variables regressionwas run to see how strongly variables are related to each other the following are the result of regression analysis.

Table No. 1: Model Summary

ModelRR SquareAdjusted R SquareStd. Error of the Estimate

1.971a.943.9327.55653

a. Predictors: (Constant), export rate in Pakistan, inflation rate of Pakistan in percentage, Annual growth in money supply (M2) in %, interest rate of Pakistan in percentage, foreign exchange reserve, Gross Domestic Product per capita per U.S. Dollars, import rate in Pakistan

Table No. 2: ANOVAb

ModelSum of SquaresDfMean SquareFSig.

1Regression34128.34874875.47885.383.000a

Residual2055.6403657.101

Total36183.98743

a. Predictors: (Constant), export rate in Pakistan, inflation rate of Pakistan in percentage, Annual growth in money supply (M2) in %, interest rate of Pakistan in percentage, foreign exchange reserve, Gross Domestic Product per capita per U.S. Dollars, import rate in Pakistanb. Dependent Variable: exchange rate of Pakistan

Table No. 3: Coefficientsa

ModelUnstandardized CoefficientsStandardized CoefficientstSig.

BStd. ErrorBeta

1(Constant)18.4626.7042.754.009

Gross Domestic Product per capita per U.S. Dollars.083.018.9424.517.000

export rate in Pakistan.000.000.6072.363.024

import rate in Pakistan.000.000-.619-2.512.017

inflation rate of Pakistan in percentage.119.216.026.552.584

foreign exchange reserve-.355.709-.065-.501.619

interest rate of Pakistan in percentage-1.334.381-.193-3.503.001

Annual growth in money supply (M2) in %-.303.191-.064-1.582.122

a. Dependent Variable: exchange rate of Pakistan

Table no. 4 : correlation

All the above done analysis interprets that the exchange rate of Pakistani rupee against U.S. dollar is consistently devaluing because of all the independent variables but some variables are strongly related to exchange rate either positively or negatively. The result of regression focus on the fact that despite of all the variables GDP, export and inflation are the main causes of devaluation of currency.With the increase in GDP economic growth the exchange rate become stable because larger expected GDP growth will tend to appreciate the exchange rate. Foreign exchange reserve also reduces the value of currency but not as efficiently as GDP, export and inflation does.The correlation coefficient R is 0.971that shows that independent variables and dependent variable has a strong linear relationship. The coefficient of determination R2 is 94.3%, which shows the strength of linear association between all the independent variables used and exchange rate. The R2= 0.943 means that 94.3% of the total fluctuation in exchange rate can be described by the linear relationship between dependent and independent variables. The remaining 5.7% of the total fluctuations in exchange rate remains unexplained. These 5.7% of the variations in exchange rate may be cause by some other factors that are not considered in this study. ANOVA produces a p value of .000 that all the variables are significantly related. The regression equation describes further changes. Y= + 1GDP + 2 INF + 3 I + 4 X + 5 IMP + 6F.E.R + 7 M.S + Y= 18.462+ 0.083 + 0.119 + (-1.334) + .000 + .000 + (-0.355) + (-0.303)This equation shows that F.E.R, M.S and interest rate have coefficient with a negative sign which means that increase in these factors can lead to decrease in exchange rate.The correlation results highlights that GDP and export are strongly correlated to each other while other variables have a less or moderate correlation. The variables having positive values indicate that increase in one variable corresponds to increase in other variable but the negative values of money supply, inflation and interest rates shows that decrease in these variables causes an increase in exchange rate.The first hypotheses isinflation is not significantly related to exchange rate which is proved to befalse as there exist a strong relationship between inflation and exchange rates of Pakistani rupee against U.S. dollar. R2 is 0.813, which is greater than zero so relationship exist between the variables but this relationship is very strong.R2= 0.813> 0 and R=0.901 >0, So here H10, which means that there exist a strong relationship between interest rate and exchange rate. This hypotheses proved to be false.The second hypotheses are interest rate is not significantly associated with exchange rate.This hypotheses also proved to be falseas there is a moderate relationship found between interest rate and exchange rate because the coefficient of determination and correlation is greater than zero. R2 is 0.288, which is greater than zero so relationship exist between the variables but this relationship is moderate.R2= 0.228 > 0 and R=0.536 >0So here H10, which means that there exist a relationship between interest rate and exchange rate. This hypotheses proved to be false.The third hypotheses isimport activity not significantly related to exchange rate of Pakistan. The result shows that there is a relationship between import and exchange rate. This hypotheses also proved to be false as their exist their exist a relationship between inflation and exchange rate because the coefficient of determination and correlation is greater than zero. R2 is 0.01 which is greater than zero so a relationship exist between the factors but this relationship is not very strong.R2= 0.01 > 0 and R=0.099>0So here H10, which means that there exist a relationship between import rate and exchange rate. This hypotheses proved to be false.

CHAPTER-FIVESUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATIONS

SummaryFindings Conclusion and Recommendations5.1 SummaryThis research paper aims to find out the main determinants that directly or indirectly cause the exchange rate volatility. Data of forty-four yearsis observed to determine the main reasons of continuous devaluation of Pakistani currency. All the variables used here are positively or negatively related to unpredictable exchange rate movement of Pakistani rupee against U.S. dollar. The variables of this research includeGDP, export, import, foreign exchange reserve, money supply, inflation rate and interest rate. From the period of 1971 to 2014, different exchange rate systems have been implemented in Pakistan but since the introduction of floating exchange rate system in Pakistan the currency keeps on devaluing against U.S. dollar. State Bank of Pakistan being the central authority has taken steps to control devaluation of currency by adopting market based exchange rate system it was beneficial for some time but then failed due to political instability and continuous rise in the level of inflation. Forty-four years annual time series data incorporating forty-four total number of observations have been used to find out the main factors affecting the exchange rate of Paksitani rupee. Graphs are drawn to see the variations in the values over a long period of time. Linear regression, coefficient of determination and correlation were run to find out main factors responsible for exchange rate volatility and it was found that exchange rate is primarily affected by GDP economic growth and export. These factors are directly related to the exchange rate as if the export activities increases within a country it will help in increasing the value of Pakistani rupee. The third most important variable is inflation as a high inflation reduces the value of the currency. All other variables considered are of less importance because they are not significantly affecting exchange rate activities in Pakistan. The result of correlation also shows that GDP is highly correlated with exchange rate. A change in GDP results in the direct change in exchange rate.

5.2 FindingsCorrelation coefficient R of 0.971that describes the association between the actual values of the independent variables used namely GDP, inflation rate, export,import, interest rate, foreign exchange reserves and interest rate and the dependent variable that is exchange rate of Paksitani rupee against U.S. dollar.The coefficient of determination R square is 0.943 that tells how deeply the independent variables are affecting the exchange rate movements of Pakistani rupee against U.S. dollar. As shown in the graph exchange rate remains stable during the period of 1973 to 1981 at a rate of 9.8 during this period the inflation and money supply was recorded lowest at an average of 7% and 9% respectively. The exchange rate was stable due to the higher economic growth, price stability.5.3 Conclusion:The theme of this research project is to describe and analyze the determinants that are responsible for the devaluation of Paksitani rupee. The current study tells that GDP economic growth rate of Pakistan and export are the main variables that is responsible for the variations in exchange rate asit represents the total amount of goods and services produced in a country. As more and more goods produced in a country will increase the export which ultimately leads to an increase in exchange rate.When the export increases the value of currency also increases devaluing other currencies. So, these two variables that are GDP economic growth rate and export are directly and significantly related to exchange rate of Pakistani rupee. The third important variable that directly affects the movement of exchange rate is inflation rate. Because when the inflation rate is high the value of the domestic currency decreases giving a rise to the value of other currencies. There is an inverse relationship between inflation rate and exchange rate of Pakistan as high inflation rate lowers the exchange rate. These three factors are very much accountable for the exchange rate volatility and controlling these variables is important as they are consistently devaluing the Pakistani rupee against U.S. Dollar. The other variables are money supply, import, foreign exchange reserve and interest rate that are also affecting exchange rate movements with in a country.5.4 Recommendations: The most important fact is that the export activities in Pakistan should be increase in order to avoid currency depreciation. Monetary and fiscal policies must be made more effective as it will help in reducing inflation and will strengthen economic growth. The debt burden should also be reduced because increased debt burden decreases the value of the currency and Pakistan is the country that is buried under a huge burden of debt. Political instability also plays an important role in devaluation of Pakistani currency as it is negatively related to exchange rate so the law and order situation must be kept stable in order to reduce exchange rate volatility. Despite of the factors illustrated above it is important to focus on other variables such as socio-economic policies and political scenrios as well because their may be many other variables that are responsible for devaluation of Pak rupee. So further study in this regard using some other variables may be conducted to see the affect of exchange rate on Pakistani rupee against some other currency like Euro, Yen, Rayal etc.

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APPENDIX AForty-four years data is considered in this study to avoid any non-stationary problem. The study focused on the problem of volatile exchange rates, which arises mainly due to GDP, inflation and exports. Pakistan is a country buried under load of foreign debts and with the passing of time the debt burden is increasing day by day which makes it less attractive for foreign investors to invest in Pakistan. Therefore,first Pakistan should try to reduce debt burden in order to increase exports and GDP economic growth of the country. Political instability is another major cause of currency devaluation. The government should try to keep the law and order situation of the country under control to avoid currency depreciation. Pakistani currency is consistently devaluing against U.S. dollar and the central bank is making efforts to control exchange rates in order to increase the value of Pakistani rupee. Exchange rate is the most important macro economic variable any change in the exchange rate affects the overall economy. Regression, coefficient of determination and correlation was runned to observe the effects of GDP, interest rate, inflation, export, import, money supply (M2) and foreign exchange reserve on exchange rate. It was found that GDP, export and inflation have a greater impact on exchange rate as compare to other variables. However many other important variables are not considered due to shortage of time. The result highlighted the facts that some variables have a direct relation with exchange rate while other variables are inversely related to the dependent variables. Pakistani currency is continuously devaluing just after the advent of floating exchange rate system in Pakistan so one way to overcome this problem is to implement some other system. This research has covered a wide range of period so that the main cause of currency devaluation can be covered. In order to make exchange rates stable government and State Bank must concentrate on fiscal and monetary policies because these policies helps in increasing GDP, export and in controlling the inflation as well.

APPENDIX BHypotheses 1: Inflation is not significantly related to exchange rate.This hypotheses proved to be wrong as inflation is strongly associated with exchange rate.

Model Summary

ModelRR SquareAdjusted R SquareStd. Error of the Estimate

1.901a.813.80812.70332

a. Predictors: (Constant), inflation rate of Pakistan in percentage

There exist a relationship between interest rate and exchange rate but this relationship is moderate and not too strong. R2= 0.813> 0 and R=0.901 >0So here H10, which means that there exist a strong relationship between interest rate and exchange rate. This hypotheses proved to be false.

Hypotheses 2: interest rate is not significantly associated with exchange rate.This hypotheses proved to be wrong on the basis of the following table:

Model Summary

ModelRR SquareAdjusted R SquareStd. Error of the Estimate

1.536a.288.27124.77163

a. Predictors: (Constant), interest rate of Pakistan in percentage

There exist a relationship between interest rate and exchange rate but this relationship is moderate and not too strong. R2= 0.228 > 0 and R=0.536 >0So here H10, which means that there exist a relationship between interest rate and exchange rate. This hypotheses proved to be false.

Hypotheses 3: Import activity not significantly related to exchange rate of Pakistan.On the basis of regression hypotheses was tested. The following tables tells that their exist a relationship bwteen interest and exchange rate but this relation is not very strong. R2= 0.01 > 0 and R=0.099>0

Model Summary

ModelRR SquareAdjusted R SquareStd. Error of the Estimate

1.099a.01-.01429.20771

a. Predictors: (Constant), import rate in Pakistan

There exist a relationship between interest rate and exchange rate but this relationship is moderate and not too strong. R2= 0.01 > 0 and R=0.099>0

So here H10, which means that there exist a relationship between import rate and exchange rate. This hypotheses proved to be false.