Reasons of Devaluation of Currency in Pakistan

Reasons of Devaluation of Currency in Pakistan

Currency Devaluation

Author: www.magcify.com Date: 01-Mar-2014

Abstract

The entire information inside this document is all in relation to define the reasons and causes of currency devaluation in Pakistan. Within this document, all the detailed information inter-related to the currency devaluation in addition to its causes, reasons, and effects are depicted. This document is supposed to really help the readers who will be concerned and paying attention to see how the Pakistani currency is devalued and what the major influencers are.

The intact process is divided into sections and categories to conduct the readers in good health, so that they can pick the information straightforwardly and thoroughly.

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Reasons of Devaluation of Currency in Pakistan Currency Devaluation

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Table of Contents

1. LIST OF VARIABLES ----------------------------------------------------------------------------------------------------------- 4

1.1. DEPENDENT VARIABLE ------------------------------------------------------------------------------------------------------- 4

1.2. INDEPENDENT VARIABLES --------------------------------------------------------------------------------------------------- 4

1.3. EXPLANATION OF DEPENDENT VARIABLE --------------------------------------------------------------------------------- 4

1.4. EXPLANATION OF INDEPENDENT VARIABLE ------------------------------------------------------------------------------- 4

1.4.1. Less Export ------------------------------------------------------------------------------------------------------------- 4

1.4.2. Over population -------------------------------------------------------------------------------------------------------- 4

1.4.3. Issuance of Currency Notes ---------------------------------------------------------------------------------------- 4

1.4.4. Inflation ------------------------------------------------------------------------------------------------------------------ 4

1.4.5. Foreign Loans ---------------------------------------------------------------------------------------------------------- 5

1.4.6. Unemployment --------------------------------------------------------------------------------------------------------- 5

1.4.7. Less Demand of Home Products ---------------------------------------------------------------------------------- 5

1.4.8. Deficit Financing ------------------------------------------------------------------------------------------------------- 5

1.4.9. Terrorism ---------------------------------------------------------------------------------------------------------------- 5

1.4.10. Economic Instability -------------------------------------------------------------------------------------------------- 5

1.4.11. More Imports ----------------------------------------------------------------------------------------------------------- 5

1.4.12. Natural Calamities ---------------------------------------------------------------------------------------------------- 5

1.4.13. Underutilization of Natural Resources --------------------------------------------------------------------------- 5

2. QUESTIONNAIRE ---------------------------------------------------------------------------------------------------------------- 6

3. SPSS DATA VIEW --------------------------------------------------------------------------------------------------------------- 7

4. SPSS VARIABLE VIEW -------------------------------------------------------------------------------------------------------- 8

5. DESCRIPTIVE ANALYSIS ----------------------------------------------------------------------------------------------------- 9

5.1. CURRENCY --------------------------------------------------------------------------------------------------------------------- 9

5.2. EXPORTS ----------------------------------------------------------------------------------------------------------------------- 9

5.3. OVERPOPULATION ---------------------------------------------------------------------------------------------------------- 10

5.4. CURRENCY NOTES --------------------------------------------------------------------------------------------------------- 11

5.5. INFLATION -------------------------------------------------------------------------------------------------------------------- 12

5.6. LOANS ------------------------------------------------------------------------------------------------------------------------ 12

5.7. UNEMPLOYMENT ------------------------------------------------------------------------------------------------------------ 13

5.8. RESERVES ------------------------------------------------------------------------------------------------------------------- 14

5.9. HOME PRODUCTS ----------------------------------------------------------------------------------------------------------- 14

5.10. TERRORISM ------------------------------------------------------------------------------------------------------------------ 15

5.11. NATURAL CALAMITIES ------------------------------------------------------------------------------------------------------ 16

5.12. NATURAL RESOURCES ----------------------------------------------------------------------------------------------------- 17

6. MULTIPLE REGRESSIONS OF ALL FACTORS ---------------------------------------------------------------------- 18

6.1. HYPOTHESIS ----------------------------------------------------------------------------------------------------------------- 18

6.2. NULL HYPOTHESIS (HO) --------------------------------------------------------------------------------------------------- 18

6.3. ALTERNATIVE HYPOTHESIS (H1) ----------------------------------------------------------------------------------------- 18

6.4. F-RATIO ---------------------------------------------------------------------------------------------------------------------- 18


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6.5. P-VALUE --------------------------------------------------------------------------------------------------------------------- 18

6.6. COEFFICIENT OF DETERMINATION (R^2) -------------------------------------------------------------------------------- 19

6.7. LEVEL OF INTERVAL -------------------------------------------------------------------------------------------------------- 19

6.8. LEVEL OF SIGNIFICANCE (ALPHA) ---------------------------------------------------------------------------------------- 19

7. MODEL ---------------------------------------------------------------------------------------------------------------------------- 20

7.1. CONSTANT OF DEPENDENT VARIABLE ----------------------------------------------------------------------------------- 20

7.2. CURRENCY V/S NATURAL CALAMITIES ---------------------------------------------------------------------------------- 20

7.3. CURRENCY V/S ECONOMIC CONDITION --------------------------------------------------------------------------------- 20

7.4. CURRENCY V/S EXPORTS ------------------------------------------------------------------------------------------------- 20

7.5. CURRENCY V/S HOME PRODUCTS--------------------------------------------------------------------------------------- 20

7.6. CURRENCY V/S IMPORTS ------------------------------------------------------------------------------------------------- 21

7.7. CURRENCY V/S INFLATION ------------------------------------------------------------------------------------------------ 21

7.8. CURRENCY V/S FOREIGN LOANS ---------------------------------------------------------------------------------------- 21

7.9. CURRENCY V/S CURRENCY NOTES ------------------------------------------------------------------------------------- 21

7.10. CURRENCY V/S OVERPOPULATION -------------------------------------------------------------------------------------- 21

7.11. CURRENCY V/S RESERVES ----------------------------------------------------------------------------------------------- 22

7.12. CURRENCY V/S NATURAL RESOURCES --------------------------------------------------------------------------------- 22

7.13. CURRENCY V/S TERRORISM ---------------------------------------------------------------------------------------------- 22

7.14. CURRENCY V/S UNEMPLOYMENT ---------------------------------------------------------------------------------------- 22

8. MULTIPLE REGRESSIONS OF FINAL 6 INDEPENDENT VARIABLES ---------------------------------------- 23

9. MODEL ---------------------------------------------------------------------------------------------------------------------------- 24

9.1. INTERPRETATION ------------------------------------------------------------------------------------------------------------ 24

9.1.1. Constant of Dependent Variable -------------------------------------------------------------------------------- 24

9.1.2. Currency V/S Natural Calamities -------------------------------------------------------------------------------- 24

9.1.3. Currency V/S Home Products ------------------------------------------------------------------------------------ 24

9.1.4. Currency V/S Imports ---------------------------------------------------------------------------------------------- 24

9.1.5. Currency V/S Inflation ---------------------------------------------------------------------------------------------- 24

9.1.6. Currency V/S Currency Notes ----------------------------------------------------------------------------------- 25

9.1.7. Currency V/S Terrorism ------------------------------------------------------------------------------------------- 25

10. CONCLUSION ------------------------------------------------------------------------------------------------------------------ 26





1. List of Variables

1.1. Dependent Variable

Currency Devaluation in Pakistan

1.2. Independent Variables

Less Exports

Overpopulation

Issuance of Currency Notes

Inflation

Foreign Loans

Unemployment

Less demand of Home Products

Deficit Financing

Terrorism

Economic Instability

More imports

Natural Calamities

Underutilization of Natural Resources

1.3. Explanation of Dependent Variable

Currency devaluation means the fall in the value of currency of any country as compare to the currencies of other countries of the world. There are many demerits of the currency devaluation but it also has some merits. Some important reasons of currency devaluation have been defined below.

1.4. Explanation of Independent Variable

1.4.1. Less Export

Less exports of home products in the international market is the major reason of currency devaluation. There is too much area in Pakistan which is not being cultivated. This area can produce product which can be exported abroad that makes the economic conditions stable.

1.4.2. Over population

Population in Pakistan is increasing very rapidly. Too meet the currency needs of this increasing population the Govt. has to issue notes. And they may become able to fulfill their routine needs.

1.4.3. Issuance of Currency Notes

The State Bank of Pakistan is issuing currency notes speedily to meet the public needs that are the reason of currency devaluation in Pakistan. According to the Quantity Theory of Money, when the quantity of money is increased, its value automatically decreased.

1.4.4. Inflation

Inflation is the situation when prices of the products increases more than the income level of the people. As a result the purchasing power of the people becomes less. High prices of the products create the necessity of issuing notes to meet the basic needs and other requirements.





1.4.5. Foreign Loans

Another worse cause of currency devaluation in Pakistan is the foreign loan. Our political leader takes loans from the other developed countries at the name of countries welfare or development. But actually loans are not used properly that leads to currency devaluation. Moreover, we have to pay interest there on.

1.4.6. Unemployment

It is the situation where people are able to do any job but they could not get job or work or they get job of less than their abilities. This thing hinders the country to grow up and becomes the reason of currency devaluation in Pakistan.

1.4.7. Less Demand of Home Products

Less demand of home products is also the biggest reason of currency devaluation in Pakistan. Exports cannot be made if there is less demand of home products in the international market and the foreign investors cannot be attracted to our country to invest their capital.

1.4.8. Deficit Financing

Deficit financing means the issuance of note by the State Bank of Pakistan without keeping any kind of reserves. In the present situation the reserve keeping rate is 33%. But when State Bank issue notes without keeping any reserve, it leads to currency devaluation.

1.4.9. Terrorism

In the present situation the biggest reason of currency devaluation in Pakistan is the Terrorism. Daily bum blasts becomes the cause of huge loss of lives and resource. Due to this the resources of nation are continuously wasting that leads to currency devaluation.

1.4.10. Economic Instability

Economic instability is also the reason of currency devaluation in Pakistan. Everyday all political parties generates disputes on the basis of religion, cast and many other things. Moreover elections are held after short time that is the loss of resources and as well as currency devaluation.

1.4.11. More Imports

The public of Pakistan prefers to buy the foreign products because of the better quality of goods. If imports are more and exports are less then balance of payment becomes unfavorable that leads to currency devaluation.

1.4.12. Natural Calamities

Natural Calamities lead to currency devaluation in all over the world. The most recent examples of the effect of natural calamities are the earth-quake of 2006 and flood of 2010. If we look back in the history of Pakistan we come to know that after every natural calamity the currency of Pakistan had been lost its worth.

1.4.13. Underutilization of Natural Resources

Another reason of the currency devaluation in Pakistan is the underutilization of natural resources. God has gifted Pakistan with a lot of natural resources but unfortunately these resources are not being properly utilized. If these resources utilize properly then the currency of Pakistan can be stable.





2. Questionnaire





3. SPSS Data View





4. SPSS Variable View





5. Descriptive Analysis

5.1. Currency

The following analysis has been performed on the data relating to the currency:

Mean = 2.80

It is the representative of value of whole data of the currency. It is the arithmetic average of numerical data. It is the most common measure of central tendency.

Median = 3

It is the most repeating value of the arranged data. It is the appropriate measure of central tendency. It is the midpoint of a distribution that the same number of scores is above the median as below.

Standard Deviation = 0.957

It tells us that how much data is dispersed. It is the most commonly used measure of the variability.

Lower Quartile = 2

It is the middle value of the first half of the data that is distributed by the median.

Upper Quartile = 4

Median distributes the whole data into two halves and it is the middle value of second half of the data.

4321

10

5

0

C1

Fre

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Curve

Histogram of Currency, with Normal

This is a negatively distributed curve because the tail on the left hand is longer than on the right hand and most of the data is lying at the end of the distribution.

Mean < Median < Mode

5.2. Exports


Mean = 2.44


Median = 3




Lower Quartile = 2






Upper Quartile = 3


4321

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C2

Fre

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Curve

Histogram of Exports, with Normal

This is a normally distributed curve because the tails on the both side are equal that is showing that most of the data lies in the mid of the distribution.

Mean = Median = Mode

5.3. Overpopulation


Mean = 2.360


Median = 2.00




Lower Quartile = 2


Upper Quartile = 3






4321

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Normal Curve

Histogram of Overpopulation, with



5.4. Currency Notes


Mean = 1.96


Median = 2




Lower Quartile = 1


Upper Quartile = 2


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Normal Curve

Histogram of Currency Notes, with

This is a positively distributed curve because the tail on the right hand side is longer than on left hand side and most of the data is lying in the start of the distribution.

Mean > Median > Mode





5.5. Inflation


Mean = 1.88


Median = 2




Lower Quartile = 1


Upper Quartile = 2.5


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Curve

Histogram of Inflation, with Normal



5.6. Loans


Mean = 2.96


Median = 3




Lower Quartile = 1.5


Upper Quartile = 4






54321

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Curve

Histogram of Loans, with Normal

This is a normally distributed curve because the tails on the both side are equal and from the mid the curve is touching its peak.


5.7. Unemployment


Mean = 2.68


Median = 2




Lower Quartile = 2




54321

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Fre

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Normal Curve

Histogram of Unemployment, with







5.8. Reserves


Mean = 3.56


Median = 4




Lower Quartile = 2


Upper Quartile = 5


54321

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C9

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Curve

Histogram of Reserves, with Normal

This is a negatively distributed curve because the tail on the left hand is longer than on the right hand and most of the data is lying at the end of the distribution.

Mean < Median < Mode

5.9. Home products


Mean = 2.76


Median = 3








Lower Quartile = 2


Upper Quartile = 4


54321

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Normal Curve

Histogram of Home Products, with



5.10. Terrorism


Mean = 2.36


Median = 2




Lower Quartile = 2


Upper Quartile = 3






54321

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Fre

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Curve

Histogram of Terrorism, with Normal



5.11. Natural Calamities


Mean = 2.68


Median = 2




Lower Quartile = 2


Upper Quartile = 4


54321

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C13

Fre

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Normal Curve

Histogram of Natural Clamities, with







5.12. Natural Resources


Mean = 1.920


Median = 1.00




Lower Quartile = 1




54321

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Fre

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Normal Curve

Histogram of Natural Resources, with







6. Multiple Regressions of all Factors

Factors Names P-values

Currency y 0.0136

Natural Calamities X1 0.1526

Economic Conditions X2 0.6700

Exports X3 0.6347

Home Products X4 0.3375

Imports X5 0.3017

Inflation X6 0.3634

Foreign Loans X7 0.4107

Currency Notes X8 0.2724

Overpopulation X9 0.5288

Reserves X10 0.4334

Natural Resources X11 0.8776

Terrorism X12 0.3944

Unemployment X13 0.9875

F-Ratio = 0.83

P-Value = 0.6335

R^2 = 49.3811

6.1. Hypothesis

To write the ideas in a statement is called Hypothesis or Preposition.

6.2. Null Hypothesis (Ho)

It means that there is no significance relationship between two variables.

6.3. Alternative Hypothesis (H1)

It means that there is a significance relationship between two variables.

6.4. F-Ratio

F-ratio is the value that tests the model that either it is good or bad. If the value is high then the model is good fit and if the value is low then the model is not good fit.

6.5. P-Value

P-value is the probability of accepting the Null hypothesis.





6.6. Coefficient of Determination (R^2)

Coefficient of determination is the explanatory power of the model. If it is more than 90 then the model is better and if it does not cross 35 then the model is not good fit.

6.7. Level of Interval

It means that how much you are confident upon your preposition.

6.8. Level of Significance (Alpha)

It describes that how much you are doubtful upon your prepositioning simple words ‘the probability of making wrong conclusion about the importance of a variable’. The lower this probability leads to the higher statistical significance. Most of the time it remains fixed up to 5%.





7. Model

Y =5.7219 + 0.4976x1 - 0.1899x2 - 0.2143x3 - 0.3137x4 - 0.3127x5 - 0.3472x6 - 0.1998x7 - 0.4706x8 + 0.2615x9 - 0.2142x10 - 0.0495x11 - 0.2952x12 - 0.0040x13

7.1. Constant of Dependent Variable

Constant of the dependent variable is 5.7219. It is showing that if all independent variables become ‘0’ then the value of ‘y’ will be minimum of 5.7219.Its p-value is 0.0136. It is very important dependent variable because:

P-Value < Alpha

0.01363 < 0.5

So we reject Ho

7.2. Currency V/S Natural Calamities

If x1 increase with 1 unit then they will increase with ‘y’ 0.4976 and vice versa. Its p-value is 0.1526. It is an important independent variable because:

P-Value < Alpha

0.1526 < 0.5

So we reject Ho

7.3. Currency V/S Economic Condition

If x2 increase with 1 unit the then ‘y’ will decrease with 0.1899 and vice versa. Its p-value is 0.6700. It is not an important independent variable because:

P-Value >Alpha

0.6700 > 0.5

So we reject H1

7.4. Currency V/S Exports

If x3 increase with 1 unit then the ‘y’ will decrease with 0.2143 and vice versa. Its p-value is 0.6347. It is not an important independent variable because:

P-Value >Alpha

0.6347 > 0.5

So we reject H1

7.5. Currency V/S Home Products

If x4 increase with 1 unit then the ‘y’ will decrease with 0.3137 and vice versa. Its p-value is 0.3375. It is an important independent variable because:

P-Value < Alpha





0.3375 < 0.5

So we reject Ho

7.6. Currency V/S Imports


P-Value < Alpha

0.3017 < 0.5

So we reject Ho

7.7. Currency V/S Inflation


P-Value < Alpha

0.3634 < 0.5

So we reject Ho

7.8. Currency V/S Foreign Loans


P-Value < Alpha

0.4107 < 0.5

So we reject Ho

7.9. Currency V/S Currency Notes


P-Value < Alpha

0.2724 < 0.5

So we reject Ho

7.10. Currency V/S Overpopulation

If x9 increase with 1 unit then the ‘y’ will increase with 0.2615 and vice versa. Its p-value is 0.5288. It is not an important independent variable because:

P-Value >Alpha

0.5288 > 0.5

So we reject H1





7.11. Currency V/S Reserves


P-Value < Alpha

0.4334 < 0.5

So we reject Ho

7.12. Currency V/S Natural Resources

If x11 increase with 1 unit then the ‘y’ will decrease with 0.0495 and vice versa. Its p-value is 0.8776. It is not an important independent variable because:

P-Value >Alpha

0.8776 > 0.5

So we reject H1

7.13. Currency V/S Terrorism


P-Value < Alpha

0.3944 < 0.5

So we reject Ho

7.14. Currency V/S Unemployment


P-Value >Alpha

0.9875 > 0.5

So we reject H1





8. Multiple Regressions of final 6 Independent Variables

Factors Names P-values

Currency Y 0.0005

Natural Calamities X1 0.1525

Home Products X2 0.1988

Imports X3 0.4870

Inflation X4 0.4718

Notes X5 0.3798

Terrorism X6 0.2915

F-Ratio = 1.66

P-Value = 0.1886

R^2 = 95.6092





9. Model

Y = 3.91047 + 0.2277x1 – 0.1979x2 + 0.0784x3 – 0.1946x4 -0.2595x5 – 0.2148x6

9.1. Interpretation

9.1.1. Constant of Dependent Variable

Constant of the dependent variable is 3.91047. It is showing that if all independent variables become ‘0’ then the value of ‘y’ will be minimum of 0.91047.Its p-value is 0.0136. It is very important dependent variable because:

P-Value < Alpha

0.0005 < 0.5

So we reject Ho

9.1.2. Currency V/S Natural Calamities

If x1 increase with 1 unit then they will increase with ‘y’ 0.2277 and vice versa. Its p-value is 0.1525. It is an important independent variable because:

P-Value < Alpha

0.1525 < 0.5

So we reject Ho

9.1.3. Currency V/S Home Products

If x4 increase with 1 unit then the ‘y’ will decrease with 0.0.1980 and vice versa. Its p-value is 0.1988. It is an important independent variable because:

P-Value < Alpha

0.1988 < 0.5

So we reject Ho

9.1.4. Currency V/S Imports

If x5 increase with 1 unit then the ‘y’ will increase with 0.0784 and vice versa. Its p-value is 0.4870. It is an important independent variable because:

P-Value < Alpha

0.4870 < 0.5

So we reject Ho

9.1.5. Currency V/S Inflation

If x6 increase with 1 unit then the ‘y’ will decrease with 0.1946and vice versa. Its p-value is 0.4718. It is an important independent variable because:

P-Value < Alpha





0.4718 < 0.5

So we reject Ho

9.1.6. Currency V/S Currency Notes


P-Value < Alpha

0.3798 < 0.5

So we reject Ho

9.1.7. Currency V/S Terrorism


P-Value < Alpha

0.2915 < 0.5

So we reject Ho





10. Conclusion

After making the all analysis we have come to know that the second model is the best model which is Y = 3.91047 + 0.2277x1 – 0.1979x2 + 0.0784x3 – 0.1946x4 -0.2595x5 – 0.2148x6. Because the P-value of this model is 0.1886 and the p-value of first model of all factors is 0.6335. It is showing that there is the less probability of accepting the Null hypothesis.

F-Ratio of this model is 1.66 whereas the F-Ratio of first model is 0.83. F-Ratio of this model is high that is why it is a best model.

Coefficient of determination of this model is 95.6092 and on the other hand the coefficient of determination of first model is 49.384. Coefficient of determination of this model is high. After comparing both of these models we can say that the second model is the best model.



Reasons of Devaluation of Currency in Pakistan

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