Pakistan’s real effective exchange rate index fell to 95.9 in September, reported the country’s central bank.
The State Bank of Pakistan (SBP) stated that the real effective exchange rate (REER) dipped by 0.7 percent month-over-month to 95.9 in September.
The REER index fell to 95.9 in Sep-21, depreciating by 0.7% compared to last month. Cumulatively, REER has depreciated by 4% since the beginning of FY22 and by around 7% from its recent peak of 103 in Apr-21.https://t.co/Ird7FDRhJ8 pic.twitter.com/vuTYRmB0SV
— SBP (@StateBank_Pak) October 26, 2021
The SBP said that the REER has depreciated by 4 percent since the start of the fiscal year (FY) 2021-2022 and by about 7 percent since its recent peak of 103 in April.
The REER is the weighted average of a country’s currency compared with an index or basket of other major currencies.
The REER differs from the spot exchange rate, which is the current amount to exchange one currency for another on the earliest possible value date. While the spot exchange rate depicts the current market price, the REER is an indicator of the value of a currency in comparison with its major trading partners.
A decrease in the REER means that a country’s exports are now cheaper and more competitive, while its imports are more expensive.
The REER can be used to assess whether a currency is overvalued or undervalued. A REER that is greater than 100 indicates that the value of the currency is overvalued, while a REER that is less than 100 indicates that it is undervalued.
At 95.9, Pakistan’s current REER value suggests that the Pakistani Rupee (PKR) is now undervalued.
Real Effective Exchange Rate (REER) clocked in at 95.9 as of Sep’21 as compared to 96.5 in Aug'21.
— Arif Habib Limited (@ArifHabibLtd) October 26, 2021
Sana Tawfiq, an Analyst at Arif Habib Limited, told The News that the Rupee has room to appreciate now that it is undervalued. She explained that the currency’s low REER will benefit exporters as it means their products will be more competitive in international markets.
The PKR has depreciated against the US Dollar (USD) by about 12 percent since its peak in May and fell to a record low yesterday at 175.27.
Analysts have highlighted that one reason for the PKR’s depreciation is the country’s widening current account deficit due to a high import bill and comparatively low exports. The currency’s lower REER may now encourage a boost in exports and discourage imports.