Pakistan’s Real Effective Exchange Rate Falls Below 100 in November

Pakistan’s Real Effective Exchange Rate (REER) decreased by 1.4 percent to 98.8 in November 2022.

According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a small decrease from the 100.2 recorded in October 2022.

The REER index depreciated to 98.8 in Nov 22 as compared to 100.2 in Oct 22. For details
EasyData: https://t.co/0pjvdnWR0w
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— SBP (@StateBank_Pak) December 21, 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 98.8 suggests that imports offer poor returns while exports are cheaper, however, the ongoing liquidity crunch and policy bottlenecks such as suspension of letters of credit (LCs) have all made exports a dismal affair.

Independent economic analyst A H H Soomro told ProPakistani,

Necessary adjustments have been made to PKR. And it has yielded a moderated and sustainable current account deficit of 1-2% of GDP. While dollar inflows are hard to secure due to IMF, and the parallel black market is rampant, further PKR depreciation is no substitute for structural reforms.

He added, “Policymakers need to first have a fresh mandate to take necessary tough measures to improve energy and fiscal situation. There may not be any medium-term clarity until new elections”.

As noted last month, money changers have reiterated that this month’s fluctuation is due to the central bank’s refusal to open letters of credit plus a big blockade on imports, despite the fact that many exporters have been waiting for raw materials since August.

With REER below equilibrium and exports becoming more marketable on paper but nuanced across physical trade channels, the coalition government still remains determined to reduce imports in order to somehow normalize domestic economic activity and aggregate demand. However, the export scenario may deteriorate despite REER being below 100, with SBP’s LCs blockade dealing a big blow to raw material imports pivotal to manufacturing at home.