A few publications last week have once again glorified the real effective exchange rate (REER) and implied that a weaker Rupee is somehow “necessary”. It’s a familiar narrative: if REER goes above 100, the currency is “overvalued”, therefore, devalue it. It’s an incomplete way to look at a modern foreign exchange (FX) market.

REER is a trade-competitiveness metric, not a fair-value model. It tells you how expensive your exports look on paper, nothing more. And in Pakistan’s case, even that link is weak.

Turkiye is the perfect example. Their REER recently touched 66, one of the cheapest in the world, and the lira still kept devaluing. Why? Because FX moves on liquidity, credibility, flows and expectations, not textbook REER levels. Or look at China’s REER at 135 and still being the biggest exporter of machinery the world has ever seen. If REER was about competitiveness than it would have collapsed many years ago. They move on capacity, credibility, costing, scale and strategy: the things Pakistan actually needs.

Our own history backs this up. The rupee collapsed from 180 to 300 in two years, one of the biggest devaluations in the region. But there was no meaningful export boom, no import compression beyond what the State Bank manually enforced, and no structural improvement. If anything, people hoarded more. A weaker currency didn’t transform anything. It just made life harder.

Currency valuation tools help, but they cannot capture the immediate pressures that move an exchange rate on any given day

Pakistan’s import basket is inelastic — we have to buy oil, wheat, machinery, and pharmaceuticals, regardless of the exchange rate. Our export mix is also price-insensitive and constrained by capacity, not currency. That’s why the classic ‘devalue to boost exports’ formula simply doesn’t hold in our case. In fact, case studies on Egypt show that the economy actually contracted after a sharp devaluation.

This is why relying on REER alone to suggest devaluation is outdated and misplaced. The International Monetary Fund (IMF) itself has quietly distanced itself from the REER prescription since 2018.

The recent noise around REER is just that: noise. The broader structure of flows, liquidity, sentiment, and policy still matters far more than a single index crossing a psychological level. While a devaluation would reignite inflation, the policy response would trigger panic imports and a run on hoarding dollars and equivalent assets.

If Pakistan wants real stability, it should look at places other than REER and devaluation, and ask questions like, ‘Why is there no domestic investment? ‘ and ‘ What will make foreign direct investment flow? What will make the cost of manufacturing lower? How to strengthen the law? And finally, how to address the elephant in the room: corruption? The FX market responds to confidence and sentiment long before it responds to any model.

The rupee collapsed from 180 to 300 in two years, yet there was no meaningful export boom, no import compression beyond what the State Bank manually enforced, and no structural improvement

In recent years, a number of frameworks have emerged to infer fair prices, but there is still no magic formula. Of these, purchasing power parity (PPP) and behavioural equilibrium exchange rate (BEER) are now used more often to gauge a currency’s relative strength. They give a sense of direction. PPP compares long-term changes in prices. BEER brings in fundamentals like productivity, interest rates and terms of trade. These tools help, but they cannot capture the immediate pressures that move an exchange rate on any given day.

Developed markets still rely on the simplest force of all: supply and demand. Every new piece of data feeds into expectations, which then adjust the currency’s level. It is a continuous repricing process.

But even supply and demand do not operate in a pure form. Perceptions can shift quickly, sentiment can tighten or loosen flows, and investors can change course without warning. It, too, is hostage to regulatory and central bank interventions, political upheaval and fiscal management.

Finding equilibrium, therefore, requires a balance: growth, inflation, fiscal space, expectations and policymaking all interacting together. It needs someone who can read the underlying tensions, weigh probabilities and adjust as new information flows in. A mindset closer to an entrepreneur than a textbook economist.

Yes, the calls for a weaker rupee have grown louder. You hear the usual arguments: global demand is soft, the Indian rupee is drifting towards INR90 per US dollar, exporters cannot win orders due to high costs, and a correction will magically “fix competitiveness.” But realistically, there are several reasons why this is unlikely.

For starters, currency is the go-to optic barometer for the government, as much political as economic. If the currency is tweaked, it opens the genie of inflation, interest rates, hoarding, and the flight of capital. We’ve seen this multiple times. Moreover, the dollar itself is down 12 per cent against other major currencies, meaning the rupee is already down against the Euro, British pound, gold, etc. Plus, macros support a stable rupee, eg reserves, IMF engagement and high remittances.

If anything, the risk right now is that the rupee may trade below Rs280 per dollar, which could destabilise the export-based industries. Swaps need to improve urgently so exporters can hedge their receivables with confidence. The central bank may need to revisit this area soon to support premiums and maintain market balance.

Faisal Mamsa is CEO of financial market data platform Tresmark

Published in Dawn, The Business and Finance Weekly, December 8th, 2025