February 20, 2023 (MLN): The Real Effective Exchange Rate (REER) index was recorded at 92.75 in January 2023 showing a drop of 3.56% MoM compared to 96.18 in December 2022, the latest monthly data published by the State Bank of Pakistan (SBP) showed today.
On a year-on-year basis, the index edges lower by 4.41% YoY against the value of 96.03 in January 2022.
It is pertinent to mention that the REER in the review month has significantly closed to its peak of 102.95 in April 2021.
Meanwhile, the Nominal Effective Exchange rate Index (NEER) declined by 3.15% MoM in December 2022 to a provisional value of 46.24 from 47.74 in November 2022.
On a yearly basis, the NEER index fell by 20.46% YoY and 5.8% MoM to 43.56 in January 2023.
To note, 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.
While the REER is an index of the price of a basket of goods in one country relative to the price of the same basket in that country's major trading partners. The prices of these baskets are expressed in the same currency using the nominal exchange rate with each trading partner.
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.
