KARACHI: Country’s Real Effective Exchange Rate (REER) index fell to 95.9 in the month of September 2021, deprecating by 0.7 percent compared to the month before, State Bank of Pakistan (SBP) reported on Tuesday.
According to SBP’s tweet on the social media platform, cumulatively REER has depreciated by four percent since the start of the current financial year and by around seven percent from its peak of 103 in April this year.
Financial sector analyst commenting on REER said that it was a basket in which a country’s currency was compared with the currencies of its trading partners to gauge whether the local currency was under-valued or over-valued.
REER helps analyse the country’s competitiveness for its trade in goods and services with its trading partners and competitor countries. It is defined as “the number of units of foreign goods which can be exchanged with one unit of domestic goods”.
Analysts said REER below 100 means the country’s exports remain competitive and imports are expensive. This reverses when REER reaches above 100.
“If it is at 100, it means it is on its fair value. If above 100, it means it is over-valued and it can depreciate and if it is below 100, then it means it is under-valued and has potential to appreciate,” Sana Tawfiq, analyst at Arif Habib Limited said.
Sana said that if the value of the Pakistani currency was seen, it was under-valued, meaning it has depreciated a lot and has the potential to appreciate. It benefits exporters, as their products become competitive in terms of trade with the trading partners of the country, she added.
REER, the cost of trades, is calculated through considering several cross country factors such as foreign exchange reserves, fiscal balance, credit demand, demographics, real interest rate, country risks and workers’ remittances, and other global financial indicators.
Khurram Schehzad, chief Executive Officer of Alpha Beta Core said as per SBP, “REER index (relative currency parity) fell to 96 till September 2021, or down 4 percent October 2021 at Rs175/dollarmeans it's depreciated by 3 percent more, totalling 7 percent or at 93”. “This means rupee is undervalued now by 7 percent, or Rs 11/dollar, to its fair value at Rs 164/dollar.”