Rupee strengthens amid REER depreciation

Pakistan’s real effective exchange rate (REER) – the value of the local currency compared to a basket of currencies of trading partner countries – depreciated by 3.62% to 100.7 in May, making exports more competitive and nominally increasing the cost of imports.

However, on a day-to-day basis, the domestic currency appreciated by Rs0.09 to close at Rs278.51 against the US dollar in the inter-bank market on Friday, due to an improvement in the supply of the greenback in the domestic economy.

According to the State Bank of Pakistan’s (SBP) data, the REER had appreciated to a multi-year high of 104.4 in April 2024. The increase in REER was recorded despite the local currency remaining largely stable against the greenback in May, at April’s level of Rs278-278.60/$.

The deceleration in inflation readings in Pakistan and globally has apparently contributed to the depreciation of the REER.

Pakistan’s central bank had maintained the REER at around 95-96 from 2019 to 2022. A REER in the range of 95-105 remains near its fair value. Below 100, exports become more competitive and imports more expensive, and vice versa.

A REER below 100 suits countries like Pakistan, which are managing with low foreign exchange reserves.

During the previous Pakistan Muslim League-Nawaz (PML-N) government, many years ago, the REER was maintained at 120-122.

In recent times, the central bank has stated that it is not targeting the REER these days.

The day-to-day appreciation in the rupee-dollar parity is seen after the country’s foreign exchange reserves increased by $31 million to $9.13 billion in the week ended June 14, 2024, according to the latest weekly update on Thursday.