Pakistan’s Real Effective Exchange Rate Hits 91.6 in July

Pakistan’s Real Effective Exchange Rate (REER) shot up by 3.86 percentage points to 91.59 in July 2023. According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a big increase from 87.73 recorded in June 2023. A REER above 100 indicates a loss in trade competitiveness with exports becoming more expensive and imports getting cheaper, while a REER below 100 means the country’s exports are competitive. Pakistan’s current REER value of 91.59 suggests that exports offer good returns on paper, but with raw material and machinery imports currently below par despite the easing of import restrictions, local production is struggling to revive itself. The federal government lifted all restrictions on imports almost 2 months ago and it will take some time until manufacturers get the right volume for reviving production. Another side of the REER spectrum shows that the Pakistani Rupee is greatly undervalued. This suggests that while exports (restricted) are more competitive at the current level of REER, the returns would still be marginal. Volumetric conversion of profits to PKR would only decrease the realized value of earnings as the rupee continues to fall against the US Dollar this month.