Pakistan’s Real Effective Exchange Rate Rises to 87.7 in June

Pakistan’s Real Effective Exchange Rate (REER) jumped by 0.4 percentage points to 87.7 in June 2023. According to the latest monthly data released by the State Bank of Pakistan (SBP), the trend indicates a marginal increase from 87.3 recorded in May 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 87.7 suggests that exports offer better returns, but with raw material and machinery imports currently below par due to import restrictions, local production will take time to reboot. The federal government lifted all restrictions on imports a few weeks ago and it will take some time until the local industry gets the right volume for reviving production. Pertinently, Pakistan’s current account posted a surplus of $334 million in June 2023, significantly higher than the surplus of $225 million posted in May 2023. The surplus is on the back of import restrictions imposed by the government since 2022. 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 week.