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PKR’s REER perhaps the main thing to worry about?

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October 3, 2019 (MLN): Foreign exchange rate (FX rate) is one of the instruments that determines the country’s relative economic health. That is why this parameter is continuously watched and studied.

In the last quarter of FY19, Pak rupee immensely weekend by 13%, QoQ, whereas in first quarter of FY20, it took a U-turn and strengthened by 2.35% against the USD. All in all, PKR cumulatively lost 12.6% since Jan’19 (9-months) and closed at PKR156.36 against the USD in the interbank market on September 30, 2019.

The appreciation of PKR against USD is attributable to several factors including: improvement of external account on the back of some structural reforms and contraction in the current account deficit (down by 54% in two months of FY20); hefty decline of 21.41% in oil import bill in July-Aug, increase in foreign reserves by 4.79% in 1QFY20 and funding by IMF for all major outflows.

Another important factor that caused PKR to appreciate is SBP’s hawkish move of raising the policy rate by 100bps for Jul-Aug FY20. This is because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes PKR to appreciate against green back. This phenomena can be seen in recent portfolio investments (short term T-bills) which increased by Rs 17.54 billion in July-Aug 2019.

In macroeconomics, nominal (NEER) and effective (REER) have a prominent place as they measure the strength of a currency against a weighted average of several foreign currencies. They provide crucial information about a country’s relative position, regarding trade competitiveness of goods and services.

On the technical front, there have been several interesting developments that include increase in Pak Rupee's Real Effective Exchange Rate Index by 1.91 percent in Jun-August 2019 while index observed a decline of 0.72 percent in the same period of last year.

On the other hand, the Nominal Effective Exchange rate Index (NEER) decreased by 1.32 percent in Jun-August 2019. Similarly, it declined by 0.70 percent during the same period of last year.

 

In addition, the external benchmark for PKR has been losing its worth because of instability in hard currencies globally. With regards to REER appreciation in exports, this assessment is ambiguous in case of Pakistan as structural factors such as energy, security also play their role.

Currently, the macroeconomic conditions seem in favor of Pakistan as external account looks comfortable, oil prices are low, foreign reserves are increasing, trade deficits are contracting, and IMF is also in ground to play its role to support major outflows. However, Pakistan might have to focus on fixing the supply side for sustainable exports growth without fiddling the price of PKR. In the meantime, the increase in REER is perhaps the main thing to worry about.

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Posted on: 2019-10-03T15:34:00+05:00

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