Pakistan’s Real Effective Exchange Rate Drops to 90.9 in September

Pakistan’s Real Effective Exchange Rate (REER) decreased by 3.7 percent to 90.9 in August 2022.

According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a big decrease from 94.4 recorded in August 2022.

The PKR has been through much in recent months, and there has been discussion about market-determined rates, artificially strong currency, and manipulation. Unfortunately, fewer people understand how the forex markets work, and with that effect, the importance of REER.

A REER above 100 indicates a loss in trade competitiveness with exports becoming more expensive and imports getting cheaper, while a REER below 100 means the country’s exports are competitive.

Pakistan’s current REER value of 90.9 suggests that exports offer better returns, but with raw material and machinery imports becoming more expensive, the trade backdrop is facing a real challenge.

Faced with a drop in remittances and worrying exchange rates, the country’s reserve wallet and below-par inflows are hurting prospects for trade growth.

Pakistan’s machinery imports witnessed 37.89 percent negative growth in Q1 amid rising costs and taxes. Actions such as restrictions on imports, particularly of machinery and spare parts, are the main challenge for exporters at the moment.

So far, Pakistan’s current account deficit fell to $0.7 billion in August compared to $1.2 billion in July 2022 and $1.5 billion reported in August 2021.

Exports during the previous quarter grew by 1.84 percent, while imports into the country decreased by 12.72 percent.

Inflows are bearish with workers’ remittances in September decreasing by 12.3 percent on a YoY basis. Compared to August, remittance inflows decreased by 10.5 percent on a month-on-month (MoM) basis in September 2022, according to central bank statistics.

With REER well below equilibrium and expensive imports bothering exporters, the coalition government expects the trade balance to moderate in the coming months on account of import contraction due to a deceleration in domestic economic activities and aggregate demand. However, the export scenario may improve due to the revival of infrastructure in flood areas of the country.