Sunday July 03, 2022

Pakistan’s real effective exchange rate stands at 99.9 in June

By Our Correspondent
July 24, 2021

KARACHI: Pakistan’s real effective exchange rate (REER) clocked in at 99.9 in June, depicting a change of 2.3 percent from the previous month’s level of 102.2, the central bank reported on Friday.

The REER index rose in February 2021, when it stood at 97.2. The increase was due to the appreciation of the exchange rate.

“The REER index clocked in at 99.9 in June 2021, after rising to 103 in April 2021, showing a depreciation of 2.3 percent over May 2021,” the State Bank of Pakistan said in a tweet.

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. “Decline in REER below 100 is good as currency has become competitive. Eventually it should also translate into improvement in the country's balance of payments and current account,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company. 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.

“Presently, the SBP is using (currencies) weight of 37 major trading partners and competitors of Pakistan for REER calculation. These weights represent not only bilateral trade volumes, but also a competition in the third markets,” the SBP said in a video explainer on REER. The current account deficit rose to $1.6 billion in June versus a deficit of $650 million in the previous month. Current account deterioration in June is largely due to an increase in imports of goods, which went up 27 percent month-on-month to reach $6.322 billion. The deficit narrowed 58 percent to $1.852 billion in FY2021 from $4.4 billion a year ago. It was 0.6 percent of GDP.

Analysts expect rupee/dollar parity to be between 165 and 170 by December 2021.

In a recent poll conducted by Topline Research, a majority of the participants (57 percent) said they expected rupee to trade between 160 and 165 by the end of 2021, while 37 percent expected it to be between 165 and 170.

“We believe rupee may find support as imports may eventually slow down on the back of (1) a market driven exchange rate regime, (2) resumption of the IMF programme and (3) potential monetary tightening. Our base case includes resumption of the IMF programme towards the end of the year and increase in policy rate by 50-100bps during 2H2021,” said an analyst in a report issued by Topline Securities.