Pakistan’s Real Effective Exchange Rate (REER) experienced a slight rise to 87.7 in June 2023, as per the latest data released by the State Bank of Pakistan (SBP). This represents a marginal improvement from the previous month’s figure of 87.3.
Implications of REER and its Impact on Trade Competitiveness
A REER value above 100 indicates a decline in trade competitiveness, making exports more expensive and imports more affordable. Conversely, a REER below 100 signifies that a country’s exports are competitive in the global market. With the current REER of 87.7, Pakistan’s exports are comparatively more advantageous. However, due to import restrictions, the country’s local production may face a delay in recovering.
Challenges for Local Production and Import Restrictions
Although the federal government recently lifted all import restrictions, the local industry will require some time to regain momentum. At present, the availability of raw materials and machinery imports remains below the desired level. Consequently, the production revival process is anticipated to be gradual.
Surplus in Current Account and the Impact on REER
In June 2023, Pakistan’s current account recorded a surplus of $334 million, a substantial increase from the $225 million surplus in May 2023. This surplus can be attributed to the import restrictions implemented by the government since 2022.
Undervaluation of the Pakistani Rupee
Looking at the other side of the REER spectrum, it becomes evident that the Pakistani Rupee is undervalued. Despite the current level of REER making exports (albeit restricted) more competitive, the potential returns remain marginal. Moreover, the depreciation of the rupee against the US Dollar further diminishes the value of earnings converted into PKR.
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