Uptick in REER Index sparks concerns among economic experts

ISLAMABAD   -  Pakistan’s Real Effective Ex­change Rate (REER) index surged to 102.2 in February 2024, marking a notable up­tick compared to the previous month’s figure of 101.8. This rise has sparked discussions among the economic experts, who have shed light on the potential chal­lenges this trend may pose to the country’s economy.

The REER index, a crucial indicator of a nation’s interna­tional competitiveness, reflects the value of a country’s curren­cy relative to a basket of other major currencies, adjusted for inflation. A higher REER value suggests an appreciation of the domestic currency, which can impact various sectors of the economy, reported WealthPK.

Economic analysts have pointed out several key im­plications of this increase in Pakistan’s REER index. In an interview with WealthPK, Asim Mustafa, Regional Head at Faysal Bank said, “An appre­ciation in the REER can lead to a decline in export competi­tiveness, as it makes the coun­try’s goods relatively more expensive for foreign buyers. This could adversely affect Pakistan’s export-oriented in­dustries, such as textiles and manufacturing, which heav­ily rely on foreign markets for revenue generation.”

“Moreover, a higher REER may also result in a surge in imports, as it makes foreign goods relatively cheaper for the domestic consumers. This could widen the country’s trade deficit, exacerbating its external imbalances and putting pres­sure on the foreign exchange reserves,” said Asim.

Dr. Haris Khan, an economist at the Institute of Bankers Paki­stan, expressed concerns over the potential impact of the ris­ing REER on Pakistan’s mac­roeconomic stability. “While an appreciation in the REER may initially seem beneficial in terms of containing inflationary pressures by reducing import costs, it could ultimately lead to a deterioration in the country’s external accounts,” he stated.

Furthermore, Haris high­lighted the importance of im­plementing appropriate policy measures to address the chal­lenges posed by the increasing REER. He emphasized the need for a comprehensive strategy that focuses on enhancing ex­port competitiveness, pro­moting import substitution industries, and attracting for­eign direct investment (FDI) to counterbalance the effects of currency appreciation.

The State Bank of Pakistan’s role in managing the exchange rate dynamics and maintain­ing stability in the foreign ex­change market was also under­scored by analysts. They urged the central bank to closely monitor the REER movements and adopt proactive measures to mitigate any adverse con­sequences for the economy. In light of these observations, the policymakers are expected to closely evaluate the evolving exchange rate dynamics and formulate targeted interven­tions to address the economic challenges associated with the rising REER. Balancing the need for exchange rate stabil­ity with the imperative of sup­porting export-led growth will be crucial in navigating Paki­stan’s economic trajectory in the coming months.

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