SBP issues Revision Study for Calculating Effective Exchange Rates for Pakistan

Aug 01, 2019 (MLN): The State Bank of Pakistan, in an attempt to demystify the calculation and methodology of the Real Effective Exchange Rate Index, has released a revision study for the calculation of the REER Index for Pakistan.

The SBP on Wednesday, July 31 2019, published the REER Index for June 2019, which showed the index to have declined by 15.8 percent compared to the corresponding period last year. However, the data was significantly revised from March 2019 based on the revision of weights assigned to Pakistan’s trading partners.

The State Bank issued a clarification on the revision saying “REER is computed against the basket currencies of major trading partners/competitors, it is a dynamic concept as trading partners/competitors for each country change overtime. Therefore, the weights and trading partners for effective exchange rates are revised periodically as a routine exercise to make the REER more reflecting of latest trading partners.”

The document further stated “In this context, using the updated trade weights and new countries, which are provided by the IMF to its member countries as it has access to extensive dataset needed for calculating basket weights, SBP has revised the NEER and REER series accordingly. The new weights are calculated by the IMF on the basis of 2013-15 trade patterns in the global economy. In case of Pakistan, this update led to increase in number of basket currencies to 37 which were previously 25 based on 2010-12 trade data. The new weights reflect the change in trade dynamics for Pakistan. For example, the share of China and other Asian economies in trade with Pakistan has risen considerably.”

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