REER index depreciates to 92.8 in Jan’23

KARACHI: Pakistan’s real effective exchange rate (REER) fell to 92.8 in January, 2023, from 96.2 a month earlier, data from the State Bank of Pakistan showed on Monday, with experts attributing the decline to devaluation of the rupee.

Analysts said the rupee depreciated by 18 percent in January but REER, the value of the rupee against a basket of trading partner currencies, by 4 percent owing to relatively higher inflation in the country.

“REER is falling as nominal parity is declining more than inflation differential with other currencies,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company. Pakistan’s consumer price index inflation jumped to 27.55 percent in January from a year earlier.

The decline in the REER index is driven by the rupee’s massive depreciation against the US dollar during the month of January after authorities decided to remove the cap on the exchange rate in a bid to meet one of the key lending conditions set by the International Monetary Fund for the revival of its stalled $6.5 billion loan programme.

In last few days however, the rupee has maintained a rising trend. It closed higher on Monday also closing at 261.88 per dollar in the interbank market, compared with 262.82 in the previous session.

In the open market, the domestic currency gained 25 paisas to settle at 267.25 per dollar. The Nominal Effective Exchange rate (NEER) is an index of the bilateral nominal exchange rates of one country relative to its major trading partners or selected basket of currencies. The bilateral nominal exchange rate index with each trading partner weighted by that country’s share in imports, exports, or total foreign trade, according to the central bank explanatory note on the topic posted on the website.

While REER is an index of the price of a basket of goods in one country relative to the price of the same basket in that country's major trading partners, it adds.

“The prices of these baskets are expressed in the same currency using the nominal exchange rate with each trading partner. The price of each trading partner's basket is weighted by its share in imports, exports, or total foreign trade.” The rupee has been gaining ground as exporters are selling their export proceeds and forward inflows in the market, with some even aggressively discounting their future bills.

The reversal of the rupee in the interbank market had also impacted retail speculators who had been busy selling with fewer and fewer buyers, said Tresmark in a note. “While we still think that the Rupee should stay in the 262-265 range, there will surely be some outruns to levels below 260,” it said.

“We do not expect these outruns to stay beyond the 2-week time frame. The two key reasons for this view is that SBP is still holding off imports & new LC issuance, to the detriment of industries and the IMF, and sooner than later they will have to resume near-normal operations,” it added.