Pakistan’s Real Effective Exchange Rate Spikes Above 100 in October

Pakistan’s Real Effective Exchange Rate (REER) increased by 10.7 percent to 100.4 in October 2022.

According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a big increase from the 90.9 recorded in September 2022.

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 100.4 suggests that exports offer poor returns while imports are cheaper, however, the ongoing liquidity crunch and overall global slowdown due to inflation have all made imports a dismal affair.

Independent economic analyst A H H Soomro told ProPakistani,

REER has gone up due to inflationary impact in other trading countries and PKR appreciation from Rs. 240 to Rs. 224. With increased inflation, chances of appreciation are low or negligible. External inflows and financing to offer clarity over medium term.

Money changers are of the view that massive fluctuation (on a month-on-month basis) comes owing to the central bank’s unwillingness to open letters of credit with many exporters waiting for raw materials since August. The index may spike further and make trade more expensive if SBP fails to assure reserve cover beyond its upcoming Sukuk payment of $1 billion.

Pakistan’s machinery group imports declined to $457 million in October 2022, which is a 9-year low. The trade deficit of the country in terms of commodities and services reduced to $11 billion during the said period as compared to $15 billion reported in the last year. Inflows of remittances, giving significant support to the current account, also reduced to $9.9 billion during the period.

With REER above equilibrium and now exports becoming more expensive than imports, the coalition government still continues to prioritize import contraction to somehow normalize domestic economic activities and aggregate demand. However, the export scenario may deteriorate due to the above-mentioned issues, with SBP’s LC blockade landing the biggest blow.

Published by
Ahsan Gardezi