Pakistan’s REER index falls to 92.8 in January

Pakistan’s Real Effective Exchange Rate (REER) saw a significant decrease in January, clocking in at 92.8 compared to 96.2 in December, according to data released by the State Bank of Pakistan (SBP) on Monday.

As per the data, the REER decreased by 4.4% on a yearly basis. On a monthly basis, the REER value declined by 3.57%.

Meanwhile, the Nominal Effective Exchange rate Index (NEER) declined by 5.8% MoM in January 2023 to a provisional value of 43.56 from 46.24 in December 2022.

Pakistan’s REER index falls further to 96.2 in December

On a yearly basis, the NEER index fell by 20.46% YoY from the value of 54.77 in January 2022.

A REER below 100 means the country’s exports are competitive, while imports are expensive. Experts say that a REER close to 100 means that the currency does not favour export competitiveness or imports.

The SBP says a REER index of 100 should not be misinterpreted as denoting the equilibrium value of the currency. “Movement of the REER away from 100 simply reflects changes relative to its average value in 2010 and is unrelated to its equilibrium value,” the central bank said in an explanatory note on the topic.

Experts attributed the development to the rupee’s massive depreciation against the US dollar during the month of January, after authorities decided to free-float the exchange rate leading to massive depreciation in the currency market.

Meanwhile, the inflation rate clocked in at 27.6% in the month of January in comparison to 24.5% in December.

Market experts say the decrease in REER value makes Pakistan’s exports more competitive.

What is REER?

As per the central bank, REER is an index of the price of a basket of goods in one country relative to the price of the same basket in that country’s major trading partners.

“The prices of these baskets expressed in the same currency using the nominal exchange rate with each trading partner. The price of each trading partner’s basket is weighted by its share in imports, exports, or total foreign trade,” the SBP website says.