REER hits six-month low

Pakistan’s real effective exchange rate (REER)—the value of the domestic currency compared to a basket of currencies from the country’s trading partners—depreciated by 58 basis points, reaching a six-month low near the equilibrium at 100.11 in June 2024, down from 100.69 in May 2024. This marks the second consecutive month of decline after the REER hit a multi-year high of 104.44 in April 2024, according to data from the State Bank of Pakistan (SBP). The reduction in the REER to around 100 suggests a slight increase in the value of imports while making exports more competitive. A REER below 100 is beneficial for countries like Pakistan, which typically run a current account deficit due to higher imports and lower exports.

The rupee-dollar exchange rate closed at Rs278.34/$ in June, compared to Rs278.33/$ in May, indicating stability over the two months. The downward trend in inflation within Pakistan and its trading partners, along with global factors, influenced the REER.

On Friday, the domestic currency appreciated by Rs0.04, closing at Rs278.13 against the US dollar in the inter-bank market. The currency has remained stable for the past four months, fluctuating within a narrow band of Rs278-278.63/$. With the latest nominal appreciation, the currency strengthened by Rs0.24/$ in the first three weeks of the current fiscal year 2024-25, compared to the June-end closing at Rs278.34/$.

Global and local research houses anticipate the currency will remain stable near the current level in the short to medium term of FY25, with a potential depreciation of a few percentage points in the second half of the year (Jan-June FY25).

Meanwhile, the price of gold retreated by Rs3,000 per tola (11.66 grams), settling at Rs251,000 in Pakistan on Friday, following a significant correction in the global commodity markets. The price dropped from an all-time high of Rs254,000 per tola on Thursday, in line with international trends, according to the All Pakistan Sarafs Gems and Jewellers Association.

In the international market, bullion decreased by $55 per ounce (31.10 grams), closing at $2,415 on Friday compared to a record high of $2,483 on Wednesday morning. The $2,400 per ounce level stood as a strong barrier on the downside. Upcoming US data on unemployment and inflation will provide further direction for the commodity, impacting prices in Pakistan as well.