KARACHI: Apropos an editorial titled ‘An expensive correction’ published on 8th February, 2021 in Business Recorder, State Bank of Pakistan (SBP) says it would like to draw newspaper’s attention to the following point:
“And while the SBP insists that one cannot measure the degree of over or under-valuation by using 100 as the key determinant in the REER (a view not shared by previous governors of the SBP) yet the SBP has to date not come up with any estimate or projection of the real rupee value other than to insist that it is a long-term concept.
SBP says: “Your [newspaper’s] statement refers to data on Real Effective Exchange Rate (REER) and argues that a movement away from 100 reflects under or over valuation of the currency. We would like to clarify once again that your [newspaper’s] understanding of the concept is wrong and that any change in REER with reference to its base year value of 100 does not suggest in any way an under or over valuation of the exchange rate. Therefore, the statement made in the editorial is incorrect and misleading.
“The concept of appreciation or depreciation of REER must not be confused with the concept of currency overvaluation or undervaluation which are entirely different concepts. Neither can overvaluation nor undervaluation be deduced from comparing the index numbers to 100. The REER index number merely shows a comparison relative to the ‘chosen’ base year.
“The extent of exchange rate under/over valuation is computed through a medium-term analysis using sustainable norms for the current account balance, fiscal balance, demographic condition, debt, etc. For example, the IMF uses an approach called External Balance Assessment to assess under/over valuation (see https://www.imf.org/en/Publications/WP/Issues/2019/03/19/The-External-Balance-Assessment-Methodology-2018-Update-46643). Nowhere does this paper state that a REER value of 100 is synonymous with the exchange rate being correctly valued.
“Finally, and as we hope it would be readily apparent, if the SBP were to change the base year used for the REER calculation, the numerical value of the REER for any given month would automatically change and it would be incredulous to argue that the extent of over/undervaluation in that month has changed simply due to changing the base year.
“Here we would also like to share that our records do not confirm that any of our previous Governors has shared any such view. However, we shall be happy to review any such statement available in public domain that you may share with us.
“You will agree that the exchange rate is a very delicate topic to comment on due to its sensitivities for the economy and particularly the financial sector. Therefore, any remark based on misconceptions could have deep negative repercussions for the financial markets.”
Copyright Business Recorder, 2021
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