LAHORE: Pakistan’s real effective exchange rate (REER) hit 32-month high at 103.3 in April, posting a change of 2.8 per cent from the previous month’s level of 100.5, the central bank reported on Monday.

The REER index has been increasing since January, when it dropped to 95.2 from 96.3 in December 2020, on the back of an appreciation of 3.4pc in the value of the rupee against the dollar during the present calendar year. The REER index returned to over 100 in March after more than two years.

REER increased after the rupee-dollar exchange rate hit Rs153.45 to the greenback on April 30. Since then the rupee has lost over 0.6pc against the dollar to fall to Rs154.4 on May 31, which means the REER may drop from the April level when the central bank publishes the index for the May. The exchange rate had appreciated to Rs152.27 on May 7 before the rupee started to lose ground against the dollar again.

Most analysts ruled out any spike in the REER index in near future or the need for any drastic weakening of the rupee, saying the market was forward-looking and had mostly factored in the increase in the reading in April. “There is no panic in the market with the current account in surplus and remittances sent home by overseas Pakistanis rising sharply,” Fahd Rauf, head of research at Ismail Iqbal Securities, told Dawn from Karachi.

Since REER is published with a lag of one month, he said, the market does not react in haste. “The more important thing is to watch how the REER reading moves on the index. The current range is good and there is nothing to worry (about the exchange rate),” he argued.

Although the majority of market analysts contend that a REER reading on the index in a range of 100-105 should not set alarm bells to go off, one expert, who requested anonymity, was of the view that the IMF may not be happy with the overvalued rupee. “I think the IMF would want REER to drop to around 95 on the index to make exports more competitive and imports more expensive. That means the central bank may have to depreciate the exchange rate,” he argued.

A Sialkot-based garments exporter said most textile and clothing exporters had suffered exchange rate losses when the rupee appreciated sharply against the dollar. “We had quoted our prices at Rs165 a dollar at that time, so had to bear losses when the exchange rate appreciated. But now we are comfortable as we have re-priced our products.”

An overvalued exchange rate was one of the major factors responsible for a drastic drop in export under the previous PML-N government as REER appreciated from 107 in 2014 to 121.46 in 2017. That made exports uncompetitive and imports cheaper, leading to expansion of the current account gap to over Rs20bn in 2018 and setting off the balance of payments crisis. The crisis forced the government to borrow heavily from home and abroad, as well as seek a $6bn IMF bailout to support its external sector.

Published in Dawn, June 1st, 2021