July 18, 2023 (MLN): Pak Rupee’s Real Effective Exchange Rate Index (REER) increased by 0.48% MoM in June 2023 to a provisional value of 87.74 from the revised value of 87.33 in May 2023.
According to data published by the State Bank of Pakistan (SBP), the REER index has decreased by 7.5% compared to June 2022.
Similarly, the Nominal Effective Exchange Rate Index (NEER) increased by 0.92% in June to a provisional value of 37.31 from the revised value of 36.97 in May. On a yearly basis, the NEER Index has decreased by 26.27%.
PKR closed June at 285.99 against the USD showing a depreciation of 0.18% compared to its value in May 2023. However, compared to June 2022 PKR has depreciated by 28.37%.
REER is a measure of the value of a currency against a weighted average of several foreign currencies, an increase in REER implies that exports become more expensive and imports become cheaper therefore, this increase indicates a decline in trade competitiveness.
The price of each trading partner’s basket is weighted by its share in imports, exports, or total foreign trade.
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, the movement of the REER away from 100 simply reflects changes relative to its average value in 2010 and is unrelated to its equilibrium value.
While 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 is weighted by that country’s share in imports, exports, or total foreign trade.
