Pakistan’s Real Effective Exchange Rate (REER), a measure of the value of a currency against a weighted average of several foreign currencies, witnessed a decrease as it clocked in at 90.1 in August 2023, down from 91.6 in July 2023, showed data released by the State Bank of Pakistan (SBP) on Monday.
A REER below 100 means the country’s exports are competitive, while imports are expensive. Therefore, an increase indicates a drop in trade competitiveness. The situation reverses when REER stands above 100 on the index.
As per the latest data by the SBP on Friday, the REER decreased 1.61% month-on-month (MoM).
When compared with August 2022, the REER value declined 5.3%, when it had stood at 95.17.
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.
Meanwhile, the Nominal Effective Exchange Rate Index (NEER) decreased 2.85% MoM in August 2023 to a provisional value of 36.72 from 37.79 in July 2023.
On a yearly basis, the NEER index fell by 23.3% from the value of 47.85 in August 2022.
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.
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