Determinants of Currency Depreciation in Pakistan

The loss of value of currency of any country with respect to foreign currencies like US $ is called Currency depreciation. Since 2008, Pakistani Rupee depreciates extensively which created many problems and hinders economic growth of country. The main reason behind this sharp decline is bad economic condition, terrorism, law and order situation, decrease in foreign portfolio investment and bad performance of stock market in Pakistan. The purpose of this research study is to analyze impact of terrorism, portfolio investment and stock market return on currency depreciation. This study uses monthly secondary data from 2003 to 2012. Both descriptive and inferential statistics are used to analyze data. The result of ADF test show that all series are stationary at level and first difference with and without trend. Correlation is used to check relationship among variables and Ordinary Least Squares (OLS) Methods is used to test impact of independent variables (terrorism, portfolio investment and stock market return) on dependent variable i.e. currency depreciation. Correlations of currency depreciation are 30%, -13% and -29% with terrorism, portfolio investment and stock market return respectively. The results suggest that terrorism has positive contributions in currency depreciation while portfolio investment and stock market return has negative impact of currency depreciation during 2003-2012