REER jumped to a six-year high

REER jumped to a six-year high

Pakistan’s real effective exchange rate (REER) – the rupee’s value against a basket of trading partners’ currencies – rose to a six-year high of 104.1 in March 2024, theoretically making imports cheaper and exports challenging.

However, Pakistan’s imports have declined due to restrictive measures taken by the government to manage low foreign exchange reserves while exports have remained stable. According to data from the National Bank of Pakistan (SBP), REER rose to 104.1 in March, the highest since 2018. In the previous month, the index stood at 102.1.

Some financial experts strongly believe that the recent wave of appreciation of the rupee will continue given the massive devaluation in the past caused by political instability and the smuggling of US dollars into neighboring countries. They forecast the rupee regaining more ground against the US dollar to Rs250/$ going forward.

The central bank has found through a study that 18-19 leading currency dealers (commercial banks) have deliberately devalued the rupee in 2021 and 2022 with the objective of reaping a windfall of Rs110 billion through exchange business.

To recall, the rupee-dollar parity was around Rs160/$ on December 31, 2020. Later, manipulation by market forces, smuggling of dollars to Afghanistan followed the financial crisis at the end of the 20-year US war in the neighboring country. country and political unrest in Pakistan since early 2022 (including a change of government in April 2022) increased pressure on the rupee, which plunged to an all-time low of Rs307.10/$ in the first week of September 2023.

Other financial experts, however, opine that Pakistan’s low foreign exchange reserves of $8.05 billion, held by the SBP, and high foreign debt repayments will not allow the rupee to rise above Rs277/$.

A possible increase in imports will increase pressure on the currency and may take it to Rs285/$ by the end of June 2024.

In the past, the Pakistan Muslim League-Nawaz (PML-N) government has tightly controlled the movement of the rupee to prevent excessive depreciation as the REER has exceeded 120 in 2016. But this time, the PML-N-led government has elected a new Finance Minister, Muhammad Aurangzeb, instead of four-time finance minister Ishaq Dar.

Aurangzeb said that the devaluation of the rupee was not a condition of the IMF, when he and his economic team were negotiating a new, bigger loan program.

Gold is losing ground

Gold on Monday fell Rs3,500 to settle at Rs248,700 per tola (11.66 grams) in line with global trends.

During the day, the precious metal fell $30 to $2,381 per ounce (31.10 grams) on the international market, according to the All Pakistan Nerve Gems and Jewelery Association.

Bullion hit an all-time high of Rs252,200 on Saturday after it surged over $2,400 an ounce in international markets in the previous week.

Earlier, gold jumped $400 an ounce in the previous four weeks amid the geopolitical crisis and the status quo in US interest rates, pointing to a decline in the near future.