Pakistan’s export competitiveness improved after the country’s Real Effective Exchange Rate (REER) decreased by 0.39% in July on a month-on-month basis.
Pakistan’s REER - a measure of the value of a currency against a weighted average of several foreign currencies - depreciated to 99.42 in July 2021 compared to 99.81 in June 2021, said the State Bank of Pakistan (SBP) on Friday.
Meanwhile, the central bank data showed that NEER (nominal effective exchange rate) during July stood at 59.34, showing a monthly decline of 1.13%.
A REER below 100 means the country’s exports are competitive, while imports are expensive. The situation reverses when REER stands above 100 on the index.
The decrease in REER implies that exports have become cheaper and imports more expensive; therefore, a decrease indicates a gain in trade competitiveness, as per the International Monetary Fund (IMF).
According to an explanatory SBP video, REER is an index number that is free from any measuring unit and is calculated with reference to a particular year called the base year which is arbitrary and subject to change over time. “Currently, the SBP is using (currencies’) weight of 37 major trading partners and competitors of Pakistan for REER calculation. These weights represent not only bilateral trade volumes but also a competition in the third markets,” stated SBP in the video.
Pakistan’s current account balance posted a deficit of $773 million in July 21, compared to a deficit of $1.6 billion in Jun 21. The central bank said that this deficit is in line with its expectations of a current account deficit of 2-3% of GDP as economic activity continued to progress.
“Despite the recent increase in CAD, SBP’s foreign reserves position continued to strengthen on monthly basis. This is in contrast to past trends and is supported by country’s market-based exchange rate system,” said SBP.