State Bank of Pakistan’s website notes that the real effective exchange rate (REER) registered at 103.73 in December 2025 – a decline from the 104.88 in November and 103.96 in October while the nominal effective foreign exchange rate (NEER) was 37.97 in December, 38.18 in November and 38 in October 2025 – a divergence of 65.76 in December, 66.7 in November and 65.96 in October.
REER is calculated against a basket of major trading partners’ currencies and adjusted for relative inflation and NEER is defined as weighted average of the rupee value relative to a basket of major trading currencies and represents an unadjusted trade weighted indicator of international competitiveness.
A rise in REER implies higher export costs, lower import costs while a declining REER indicates depreciation. Its calculation is through multiplying NEER by the ratio of foreign prices to domestic prices (or adjusted to headline inflation — the consumer price index). If the NEER is greater than REER it implies that domestic goods (exports) are more expensive for foreigners, which, in turn, reduces the country’s export competitiveness.
If the NEER is lower than REER it implies that the currency is undervalued or exports are competitive (a condition which is not apparent in Pakistan, given the steady rise in the trade deficit).
Two factoids with respect to Pakistan are relevant. First, till end April 2019 the REER above 100 was indicative of an overvalued rupee and less than 100 as an undervalued rupee.
READ MORE: Pakistan’s REER index depreciates to 103.73 in December 2025
This changed post 6 May 2019 after Reza Baqir, then serving as the International Monetary Fund’s Country Director for Egypt, was appointed as the Governor SBP on 5 May 2019 (who then hired another IMF staff as the senior most Deputy Director of the SBP, Murtaza Syed, who, after the end of Baqir’s tenure, was appointed as acting Governor though he was never confirmed in that position).
Second, there is little clarity that after Baqir’s departure and the appointment of the incumbent Governor by the PML-N the REER calculation reverted to the pre-Baqir days though the SBP continues to cite the following three footnotes dating back to the Baqir era: “A REER index of 100 should not be misinterpreted as denoting equilibrium value of the currency. 100 merely represents the value of the currency of a chosen point in time (in this case the average value of the currency in 2010).
Therefore, movement of the REER away from 100 simply reflects changes relative to the average value in 2010 and is unrelated to the equilibrium value…. From July 2020, PBS has discontinued the dissemination of CPI on base 2007-08 using which the REER index was calculated, and changed the base to 2015-16. For the compilation of the REER index, therefore, the CPI — base 2015-16 has been spliced and rebased to 2010 using the IMF’s methodology.
RPI and REER indices may be revised due to revisions in base period or splicing factor of CPIs data by PBS….Appreciation (depreciation) of REER is sometimes confused with the concept of currency overvaluation (undervaluation) while these are two separate concepts and not necessarily interpreted in the same direction.
For an assessment of a country’s exchange rate misalignment, a more sophisticated analysis is required taking into account factors such as demographics, external and fiscal sustainability, and some other macroeconomic fundamentals over the medium-term.”
The question is why has such a sophisticated analysis not been carried out by the two IMF implants or by qualified SBP staff since their departure, given that time series exercise is undertaken routinely by the Bank of International Settlements (BIS) for 64 countries – Pakistan is not one of them.
And of further concern is the fact that the 2010 average rupee value was 85.17 to 85.19 to the dollar, lower than the 2015-16 104.71 to the dollar with today’s rate of 280 rupees to the dollar.
Be that as it may, in Pakistan the difference between the REER and NEER is on average above 65 points which necessitates a comparison with other countries. Data as of 31 December 2025 for five countries and the EU collectively with CPI based average period 2020=100 for which BIS calculates long term time series on NEER and REER is as follows: China REER 89.2 NEER 107.1; India REER 93 and NEER 86.4, Saudi Arabia REER 100.4 and NEER 109, Indonesia REER 94 and NEER 94, Japan REER 68.8 and NEER 70.7 and Euro area REER 105 and NEER 110.9. Granted that BIS does not calculate for the remaining 131 countries (UN calculates total number of countries at 193 with 2 observers) and many of those may be experiencing as wide a margin between REER and NEER as Pakistan however the margin itself raises some serious questions.
Theory suggests that a significant divergence between the two signal a change in domestic inflation that is at a markedly different rate than that of trading partners which can erode competitiveness if the currency remains stable — the Pakistani rupee has been stable for over a year and average inflation has come down dramatically from 28.79 percent in 2023-24 to 7.22 percent in 2024-25 and 5.15 percent in the first seven months of the current year.
And yet Pakistan’s trade data shows a worsening deficit – from negative 14.1 billion dollars July-January 2024-25 to negative 18.4 billion dollars in the same period this year (exports declining from 19.33 billion dollars to 18.26 billion dollars while imports jumped from 33.38 billion dollars to 36.66 billion dollars).
The rise in trade deficit is sourced to the boom-bust cycle that has compelled the country to go on an International Monetary Fund (IMF) programme for the twenty-fifth time. The cycle is explained in the 10 October 2024 IMF documents as follows: “Economic volatility has only increased over time, with a tight correlation between Pakistan’s boom-bust economic outcomes and its macroeconomic policies.
The repeated attempts to boost economic activity through fiscal and monetary stimulus have not translated into durable growth, as domestic demand increased beyond Pakistan’s sustainable capacity, resulting in inflation and depletion of reserves, given a strong political preference for stable exchange rates.
Each subsequent bust has further harmed Pakistan’s policymaking credibility and investment sentiment.”
This raises questions about a host of government claims, notably the stability of the external value of the rupee (which has been relatively stable at around 280 to the dollar for months) and internal rupee value (average CPI 5.15 percent).
The IMF noted in the 10 October documents that “important shortcomings remains in the source data available for sectors accounting for around a third of GDP…the authorities are prioritizing addressing these weaknesses, supported by the Fund technical assistance.”
However, TA began on the first day of the current fiscal year, 1 July 2025, and was limited to PBS with a scheduled completion on 30 June 2026, but time will tell whether it will go the same way as other TA’s – a report with associated specific recommendations that gathers dust in a cupboard that is never opened.
Copyright Business Recorder, 2026