Editorial
The State Bank of Pakistan (SBP) reported that the Real Effective Exchange Rate (REER) index for the rupee stood at 103.7 in December 2024, marking a slight increase from 103.2 in November. This is the highest REER since April 2024, indicating the rupee’s strengthening from a low of 85.3 in April 2023. However, the SBP cautioned that the REER should not be interpreted as the equilibrium value of the currency. While the index above 100 reflects that the rupee hasn’t depreciated enough to account for inflation disparities between Pakistan and global rates, it signals some positive trends.
Despite only a marginal change in the nominal exchange rate (from Rs 279.18 per US$ in December 2023 to Rs 278.12 in December 2024), the rupee has benefited from improved external balances, bolstered by an IMF loan and rising foreign exchange reserves, which grew from USD 4 billion in June 2023 to nearly USD 12 billion by December 2024. Inflation has also decreased, dropping from 28.8% in late 2023 to 7.2% in the latter half of 2024, contributing to the currency’s appreciation.
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Yet, this stability contrasts with the situation in 2017-18 when a strong rupee led to an unsustainable current account deficit. Today, Pakistan is experiencing a rare surplus, aided by rising exports in key sectors like rice and textiles, alongside lower oil prices and a surge in workers’ remittances.
However, several risks loom. Oil prices have surged, and expected changes in US tariffs could affect exports. Additionally, imports of cotton and wheat may rise due to poor local crops. While foreign reserves are strong, the financial account has shown signs of weakness, and upcoming IMF reviews could test the sustainability of the rupee’s stability. The SBP’s economic management will be crucial in maintaining this balance.