Pakistan’s real effective exchange rate (REER) - a measure of the value of a currency against a weighted average of several foreign currencies - declined to 99.9 in June, said the State Bank of Pakistan (SBP) on Friday.
“The REER index clocked in at 99.9 in Jun-21, after rising to 103 in Apr-21,” said SBP in a tweet post. The REER displayed a depreciation of 2.3% over May-21, the central bank added, as Pakistan's goods become more competitive in the international markets.
The central bank data showed that NEER (nominal effective exchange rate) during June stood at 60.01, whereas REER at 99.85.
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.
The REER is calculated by multiplying NEER with the relative price index or RPI.
C/A surplus turns to deficit on higher import bill
Pakistan’s cumulative current account (C/A) posted a deficit of $1.8 billion during July-June FY21, mainly due to a higher import bill.
The current account, on a cumulative basis, was in a surplus in the July-May FY21 period on the back of record home remittances inflows, recovery in exports, and deferred interest payments on external debt. However, the surplus turned into a deficit with last-month's figures alone mainly due to rising industrial imports. The FY21 ended up with a current account deficit of $1.85 billion against $4.449-billion deficit in FY20, depicting a decline of 58 percent or $2.59 billion.
Rupee declines to nine-month low as import bill mounts
Earlier this week, the Pakistani rupee also declined to its lowest value in almost nine months, losing close to one percent against the US Dollar in inter-bank trading on Monday.