REER improves to 99.42 point

Recovery in real effective exchange rate will help narrow trade deficit

KARACHI:

Pakistan’s real effective exchange rate (REER) – the cost of international trade – further improved to 99.42 points on the index in July, making the country’s exports competitive and imports expensive.

The improvement in the REER should help narrowing down the country’s trade deficit which was widening due to exorbitant import payments compared to sluggish export earnings for the past few months.

The trade deficit widened 85.53% to $3.10 billion in July compared to $1.67 billion in the same month last year.

The real effective exchange rate below 100 means the country’s exports remain competitive and import expensive. The situation reverses when REER stands above 100 on the index, it was learnt.

It improved by 39 basis points in July compared to 99.81 points in June, according to the data released by the State Bank of Pakistan’s (SBP).

REER is calculated through taking in account the value of country’s currency versus basket of trading partners’ currencies, inflation reading in domestic and trading partners’ countries, export competitiveness between the country and trading partners in a third country, it was learnt.

“The REER in end-July stood very close to 100 which was a fair number,” Topline Securities Director Research Syed Atif Zafar said while speaking to The Express Tribune.

“The latest number of REER suggested the currency was fairly valued at this point (end-July).”

The local currency ended up at Rs162.43 against the US dollar in the inter-bank market on July 30, 2021, according to the central bank.

It further depreciated by slightly over 1% (or Rs1.75) to Rs164.14 to the greenback on Friday, the last working day, since end of July.

“REER is expected to remain stable at around current number, going forward, considering our (rupee-dollar) exchange-rate is now driven by market forces,” he said.

“Our market based exchange rate would take good care of the real effective exchange rate. The rupee would depreciate in case trade deficit widens (due to higher import payment and/or sluggish export earnings),” he added.

“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,” according to a central bank video explaining REER’s concept, construction and interpretation.

Published in The Express Tribune, August 22^nd, 2021.

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