What Is The Cost Of Floating Exchange Rate?

Cost of floating exchange rate:
There is no doubt that fluctuating exchange rate automatically corrects disequilibrium in the balance of payments but at what cost? The main problems associated with fully convertible exchange rates are as follows;

1- Uncertainty and decline in trade:
The rise and fall in the value of the currency creates uncertainties in trade and so discourages the flow of trade.

2- Terms of trade:
If the terms of trade of country are deteriorating over a larger period of time, it will be further worsened by decline in the value of money.

3- Destabilizing effect;
Wide fluctuations in the exchange rate, depresses the industries producing internationally traded goods.

4- Unfavourable balance of payments:
If a country is faced with chronic adverse balance of payments, deteriorating terms of trade and have elastic demand for export goods in the international market, it will lead to push up inflation in the country.

The Governor SBP supports the rationale of convertibility of rupee. According to him the time for adoption of convertibility of rupee is very appropriate. The level of foreign exchange reserves has gone up to 2.14 billion dollars fiscal deficit has been slashed in the current budget 1994-95and progress has been made in improving the macro-economic situations. The managing of exchange rate in a flexible manner is in the economic interest of the country.

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