The SBP has released the estimate of the Real Effective Exchange Rate (REER) Index of the rupee in December 2024. It stands at 103.7, as compared to 103.2 in November. The value in December is the highest since April 2024 when it stood at 104.4.

The SBP has cautioned that the REER index should not be misinterpreted as denoting the equilibrium value of the currency. However, the change in the magnitude of the REER from a low of 85.3 in April 2023 to the recent value of 103.7 must be seen as a clear indication of the strengthening of the rupee.

The rise of the index to above 100 indicates that the rupee has not depreciated enough to reflect the difference between the rate of inflation in Pakistan and the global rate of inflation.

Between December 2023 and December 2024 there has been only a marginal change in the nominal exchange rate. It was Rs 279.18 per US$ in December 2023 and has, in fact, strengthened marginally to Rs 278.12 per US$ in December 2024.

The strengthening of the rupee is attributable to the improvement in the external balance of payments position, which was facilitated by the IMF Stand-by Facility of 2023-24. The foreign exchange reserves had plummeted to only USD 4 billon in June 2023; they rose subsequently to $9 billion by June 2024 and now stand at close to USD12 billion.

The appreciation in the REER is also attributable to the quantum decline in the rate of inflation in Pakistan. It was as high as 28.8 percent in July to December 2023. The last six months it is down to only 7.2 percent.

The last time the REER was significantly above 100 was in 2017-18. The peak value was 107.3........

© Business Recorder