Pakistan’s Real Effective Exchange Rate Drops to 86.4 in February

Pakistan’s Real Effective Exchange Rate (REER) decreased by 8 percent to 86.4 in February 2023.

According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a big decrease from 94 recorded in January 2023.

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 86.4 suggests that exports offer better returns, but with raw material and machinery imports currently ‘unreachable’ due to import restrictions, local production is next to nothing. Pertinently, Pakistan’s current account deficit (CAD) decreased by 86 percent on a year-on-year (YoY) basis to clock in at $74 million in February. The low CAD is on the back of import restrictions imposed by the government. The restrictions have been in place since June 2022 and since then, restrictions on letters of credit (LCs) have crippled industries dependent on raw material imports.

Another side of the REER spectrum shows that the Pakistani Rupee is greatly undervalued. This suggests that while exports (restricted) are theoretically more competitive at the current level of REER, the returns would still be marginal as a local unit has undesirably weak fundamentals. Volumetric conversion of profits to PKR would only decrease the realized value of earnings.

While argumentative, experts attributed the REER drop to the rupee’s massive depreciation against the US dollar during the month of February, after authorities in end-January decided to free-float the exchange rate.

Faced with political and economic uncertainties, Pakistan has barred all imports except a few essential food, medicine, and industry-focused raw material until a $1.1 bailout agreement with the International Monetary Fund (IMF) is reached.

Steel, textiles, and pharmaceutical industries are barely operating, forcing thousands of factories to close and worsening unemployment.

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