Pakistan’s Real Effective Exchange Rate (REER) decreased by 8 percent to86.4 in February 2023.
According to the latest monthly data released by the State Bank of Pakistan(SBP), the trend indicates a big decrease from 94 recorded in January 2023.
A REER above 100 indicates a loss in trade competitiveness with exportsbecoming more expensive and imports getting cheaper, while a REER below 100means the country’s exports are competitive.
Pakistan’s current REER value of 86.4 suggests that exports offer betterreturns, but with raw material and machinery imports currently‘unreachable’ due to import restrictions, local production is next tonothing. Pertinently, Pakistan’s current account deficit (CAD) decreased by86 percent on a year-on-year (YoY) basis to clock in at $74 million inFebruary. The low CAD is on the back of import restrictions imposed by thegovernment. The restrictions have been in place since June 2022 and sincethen, restrictions on letters of credit (LCs) have crippled industriesdependent on raw material imports.
Another side of the REER spectrum shows that the Pakistani Rupee is greatlyundervalued. This suggests that while exports (restricted) aretheoretically more competitive at the current level of REER, the returnswould still be marginal as a local unit has undesirably weak fundamentals.Volumetric conversion of profits to PKR would only decrease the realizedvalue of earnings.
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While argumentative, experts attributed the REER drop to the rupee’smassive depreciation against the US dollar during the month of February,after authorities in end-January decided to free-float the exchange rate.
Faced with political and economic uncertainties, Pakistan has barred allimports except a few essential food, medicine, and industry-focused rawmaterial until a $1.1 bailout agreement with the International MonetaryFund (IMF) is reached.
