Impact of Exchange Rate Fluctuation and Political Instability on Economic Growth of Pakistan

Abstract

This study examines how exchange rate volatility and political instability have influenced Pakistan's economic growth between 1980 and 2024, based on annual time-series data. The Gross Domestic Product (GDP) growth rate is the dependent variable, with the exchange rate and a political instability index serving as the primary explanatory variables. To investigate these relationships, the study utilizes Ordinary Least Squares (OLS) regression via EViews while ensuring that standard econometric diagnostics for model validity are applied.

Empirical findings indicate that exchange rate depreciation significantly hinders economic growth, suggesting that currency volatility negatively impacts investment, trade, and overall economic performance. Furthermore, political instability hinders growth, indicating that governance uncertainty, inconsistent policies, and weak institutions erode investor confidence and dampen economic activity. The analysis underscores the interconnectedness of macroeconomic and political stability, illustrating that Pakistan's sustainable economic growth depends on the prudent management of both financial markets and political institutions.