REER index appreciates to 100.4 in October

Our Correspondent
Thursday, Dec 01, 2022

KARACHI: Pakistan’s real effective exchange rate (REER), the value of the rupee against a basket of trading partner currencies, rose to 100.4 in October from 90.7 in the previous month, data from the State Bank of Pakistan showed on Wednesday.

The REER shows the relative competitiveness of the rupee versus the trade-weighted basket of currencies.

Analysts said the 10 percent month-on-month increase in the REER in October was a sign of fundamental weakness in the rupee.

The rupee remained flat against the dollar during the last three sessions. In the interbank market, the rupee ended at 223.95 per dollar, unchanged from the previous close.

After a fresh REER reading, it seems the rupee would trade in the 220-230 range against the dollar in the coming days.

Fahad Rauf, head of research at Ismail Iqbal Securities, said the currency was fairly valued on a REER basis. However, the problem was the dollar crunch, not the REER.

“There is a huge gap between interbank and grey market rates. We need dollar flows to manage that. The IMF (International Monetary Fund) needs to resume soon,” Rauf added.

In response to the question of whether the market would see panic over foreign reserves after the $1 billion Sukuk payment on Friday. Rauf replied, “Not really. $500 million has come from AIIB (Asian Infrastructure Investment Bank). So reserves would remain protected to a large extent. But the IMF clarity is important.”

Last week, the SBP said the international bond repayment would not have any impact on foreign reserves as the funding has already been arranged.

It seems that the ninth review of the IMF Extended Fund Facility might not be completed soon due to slow progress in discussions.

Therefore, the disbursement of the $1.18 billion tranche may not take place this year.

As long as REER remains under 100, there is no problem, but if it exceeds that mark in the long-term, the country may see an increase in its trade deficit, according to analysts.

Pakistan’s trade deficit narrowed 26 percent to $11.5 billion in the first four months (July-October) of the current fiscal year. The decline in the trade gap is largely driven by a reduction in imports, which fell 16 percent to $21 billion. Exports slightly rose 1 percent to $9.6 billion.

“Softening commodity prices along with administrative controls will keep the imports at manageable levels in coming months,” said an analyst at Insight Securities.

“However, the slowdown in textile exports, on the back of higher inflation and muted demand in the USA and EU will put some pressure on the trade deficit. Furthermore, widening spread in the forex market has dented remittances inflow from formal channels, which will adversely affect the current account deficit,” it added.