Pakistan’s Real Effective Exchange Rate (REER), a vital indicator of a currency’s value against a weighted average of various foreign currencies, has experienced a slight increase. Data released by the State Bank of Pakistan (SBP) on Wednesday revealed a REER of 98.86 in December 2023, up from 98.27 in November 2023.

  • UNDERSTANDING REER AND ITS IMPLICATIONS:

    Competitiveness Dynamics: A REER below 100 indicates that a country’s exports are competitive, while imports become relatively expensive. Conversely, when REER surpasses 100, it signals a decline in trade competitiveness.

  • Marginal Increase: The 0.6% month-on-month (MoM) increase in December 2023 suggests a subtle reduction in trade competitiveness for Pakistan.
  • Yearly Comparison: In comparison to December 2022, the REER has grown by 1.4%, reaching 97.47 during the same period last year.

CLARIFICATION BY SBP:

The SBP provided clarification that a REER index of 100 should not be misconstrued as denoting the equilibrium value of the currency. The movement of the REER away from 100 reflects changes relative to its average value in 2010 and is unrelated to its equilibrium value, according to the central bank.

  • NOMINAL EFFECTIVE EXCHANGE RATE INDEX (NEER) DYNAMICS:

    Monthly Decline: The Nominal Effective Exchange Rate Index (NEER) witnessed a 0.12% MoM decrease in December 2023, reaching a provisional value of 37.94, down from 37.98 in November 2023.

  • Yearly Comparison: On a yearly basis, the NEER index fell by 20% from the value of 47.26 in December 2022.

REER IN CONTEXT:

REER serves as an index of the price of a basket of goods in one country relative to the price of the same basket in its major trading partners. The weighted average considers the prices of these baskets expressed in the same currency using the nominal exchange rate with each trading partner.

The dynamics of REER and NEER provide valuable insights into the competitiveness of Pakistan’s trade, emphasizing the importance of monitoring and strategic considerations in the country’s economic policies.

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