State Bank of Pakistan’s website notes that the real effective exchange rate (REER) registered at 103.73 in December 2025 – a decline from the 104.88 in November and 103.96 in October while the nominal effective foreign exchange rate (NEER) was 37.97 in December, 38.18 in November and 38 in October 2025 – a divergence of 65.76 in December, 66.7 in November and 65.96 in October.

REER is calculated against a basket of major trading partners’ currencies and adjusted for relative inflation and NEER is defined as weighted average of the rupee value relative to a basket of major trading currencies and represents an unadjusted trade weighted indicator of international competitiveness.

A rise in REER implies higher export costs, lower import costs while a declining REER indicates depreciation. Its calculation is through multiplying NEER by the ratio of foreign prices to domestic prices (or adjusted to headline inflation — the consumer price index). If the NEER is greater than REER it implies that domestic goods (exports) are more expensive for foreigners, which, in turn, reduces the country’s export competitiveness.

If the NEER is lower than REER it implies that the currency is undervalued or exports are competitive (a condition which is not apparent in Pakistan, given the steady rise in the trade deficit).

Two factoids with respect to Pakistan are relevant. First, till end April 2019 the REER above 100 was indicative of an overvalued rupee and less than 100 as an undervalued rupee.

READ MORE: Pakistan’s REER index depreciates to 103.73 in December 2025

This changed post 6 May 2019 after Reza Baqir, then serving as the International Monetary Fund’s Country Director for Egypt, was appointed as the Governor SBP on 5 May 2019 (who then hired another IMF staff as the senior most........

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