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Monday July 15, 2024

REER index hits all-time low of 86.4 in February

By Our Correspondent
March 22, 2023

KARACHI: Pakistan’s real effective exchange rate (REER) dropped to an all-time low in February, falling to 86.4 from 94 in the previous month, data from the central bank showed on Tuesday.

The REER, however, has had little impact on the movement of the currency amid a severe shortage of US dollars, according to analysts. The real effective exchange rate measures the rupee's value against a basket of trading partners' currencies.

As a result of the drying up of the external inflows amid a delay in the IMF programme, Tahir Abbas, head of research at Arif Habib Limited, stated that there was a strong demand for dollars and a short supply. “Although the REER has decreased significantly and hit an all-time low, it is not particularly meaningful given the circumstances in Pakistan,” Abbas said. Pakistan has been experiencing difficulty securing a bailout deal with the International Monetary Fund (IMF), despite fulfilling all prerequisites. According to the IMF, Pakistan needs to complete a few more tasks before it can unlock a $6.5 billion loan, which puts pressure on the government to obtain guarantees from friendly countries that have pledged financial support. Now that Sri Lanka has obtained financing from the multilateral lender and Bangladesh is continuing to implement IMF-mandated reforms, Pakistan is the only South Asian nation that has not yet received assistance from the lender.

Even though the government expects inflows from three friendly Gulf nations, there has been no commitment or inflow from any of them, and it appears that a staff-level agreement with the IMF won't be implemented until then. Pakistan’s foreign exchange reserves held by the central bank have fallen to $4.319 billion—enough to cover around one month of imports.

“It suggests that the rupee is undervalued based on REER. However, amid a serious dollar crunch, it is sort of meaningless,” said Fahad Rauf, head of research at Ismail Iqbal Securities. The rupee remains under pressure due to uncertainty surrounding the resumption of the IMF programme and ongoing political turmoil in the country. On Tuesday, the rupee fell 0.04 percent to 283.92 per dollar in the interbank market. However, in the open market, the local unit gained 50 paisas to settle at 285.50 per dollar.

“REER fall means Pakistani rupee has become relatively cheaper than its trading partners and has become more competitive,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

According to the central bank explanatory note on the topic posted on the website, the REER is an index of the price of a basket of goods in one country relative to the price of the same basket in that country's major trading partners.

“The prices of these baskets are expressed in the same currency using the nominal exchange rate with each trading partner. The price of each trading partner's basket is weighted by its share in imports, exports, or total foreign trade,” it said.