Bhai Meray it is very simple India devalued it's currency to tackle Pakistani export of rice and textile and IT and other competitive exports. Pakistan is just taking back the advantage. Pakistan has grown it's share in ME and Europe food market this is good news. it will reduce trade deficit and more import taxes are coming in as well. so yes it is that simple.
You want to go to micro economics be my guest. It will also help there as well.
@Major Sam
How to tackle the deficits
Let’s now turn to the instruments available to deal with the twin deficits. Scaling down the fiscal deficit, which is theoretically the best option, is politically very difficult to do.
While most people or groups may favour it, few, if any, are willing to pay personal price the reduced fiscal deficit entails in the form of curtailed allocations or higher taxes. Thus, the government has to look for indirect instruments.
One such instrument is monetary policy. Unlike fiscal expansion, monetary expansion lowers interest rates, while unlike fiscal contraction, monetary contraction increases interest rates. With a view to stimulating growth, the SBP had pursued an easy or expansionary monetary policy in recent years. From October 2015 till May 2016, a 6% policy rate was maintained. From June 2016 to December 2017, the policy rate was pegged at 5.75%, which was enhanced to 6% in January 2018.
In the May 2018 monetary policy statement, the policy rate was hiked by 50 basis points to 6.5%. The decision has been taken to curb domestic, including import, demand.
Increase in the discount rate signals a restrictive monetary policy. However, the monetary contraction may not be of much effect if fiscal expansion does not slow down.
Another instrument is letting the exchange rate depreciate to curb imports and encourage export demand. The government has already used this instrument thrice in recent months. But so far this has not helped in bringing down the trade deficit.
That said, there is generally a lag between depreciation and improvement in the trade balance as import and export orders are made well in advance. Therefore, we will have to wait for a few more months to gauge the impact of rupee depreciation on the trade deficit.
No one like depreciation because it hurts in short run but it helps in the long run.
