Karachi February 20 2023: The REER index was recorded at 92.8 in January 2023 as compared to 96.2 in December 2022 improved by 340 basis points, according to data published by State Bank of Pakistan.
While during the month of January 2023 Pak rupee depreciate 15.4 percent to close the month at 268, as per official data of SBP.
“The “real effective exchange rate” (REER) is the best representation of how competitive the Rupee is in international markets. It reflects the cost of our exports abroad by adjusting for any change in their prices in Pakistan.” Says Murtaza Syed Ex Deputy Governor State Bank of Pakistan.
He added, “At a minimum, therefore, you should expect the Rupee to depreciate every year by how much inflation in Pakistan has gone up relative to other countries (given historical patterns, unless we bring out inflation down, this is around 5-10% a year).”
“A common mistake people (including, believe it or not, our current Finance Minister) make is to assume that a REER value of 100 represents the fair value of the Rupee” He said.
He further added, “So if we want a strong Rupee, we should (1) lower our inflation, (2) become more productive, (3) slow down population growth and increase domestic savings (including by running a tighter fiscal policy), (4) maintain appropriately high interest rates”
Note: A REER index of 100 should not be misinterpreted as denoting the equilibrium value of the currency. 100 merely represents the value of the currency at a chosen point in time (in this case the average value of the currency in 2010). Therefore, movement of the REER away from 100 simply reflects changes relative to its average value in 2010 and is unrelated to its equilibrium value.
