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REER index falls further to 95.6 in October 2021

By: SteelBis Research


The rupee lost 48 paisas (0.27%) to close at Rs175.46 against the greenback in the inter-bank market on Friday, November 26, 2021, according to data released by the State Bank of Pakistan (SBP). The currency also depreciated by 0.13% over the week as compared to its last Friday closing at 175.24.

The currency has maintained a downtrend since May 14, 2021 — when it touched a 22-month high of Rs152.27 — and has lost a cumulative 15.2% (or Rs23.19) in the past six months.

Meanwhile, the real effective exchange rate (REER) index fell further to 95.6 in October 2021, a decline of 0.3% compared to the previous month. Cumulatively, REER has declined by 4.2% since June 2021 and 7.2% from its recent peak in April 2021.

On November 25th 2021, State Bank of Pakistan reported that the foreign exchange reserves fell 4.1% to their lowest level since June 25, 2021.

According to data by the central bank, reserves were recorded at $16,254.1 million on November 19, down $691 million compared with $16,945.4 million on November 12 due to “external debt repayments”.

The total liquid foreign exchange reserves, including reserves held by banks other than the SBP, dropped to its seven-month low. Total reserves stood at $22,773.8 million, recording a decline of $777 million — lowest since April 30, 2021.

Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, have offset rising external risks from a widening current-account deficit, said Fitch Ratings late on Wednesday.

Citing the widening current account deficit (CAD), it mentioned that the current-account deficit in the ongoing fiscal year to June 2022 “is set to be wider than our previous forecast of 2.2%.”

The State Bank of Pakistan (SBP) on November 19, 2021, raised its policy rate by a significant 150bp to 8.75%, “pointing to rising risks related to the balance of payments and inflation,” the statement read.

The credit rating agency said: “We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing.”

Official reserve assets nearly doubled to $24.1 billion by the end of September 2021 from $12.6 billion two years ago. However, liquid foreign-exchange reserves have dropped since mid-September, which “we believe may partly reflect debt repayment.”

Following a staff-level agreement on the sixth review of the country’s Extended Fund Facility (EFF) reached on November 21, “we expect the IMF to release a further $1 billion in funding, provided certain prior actions are met.”

The American agency underlined that sustained reform efforts and commitment to the IMF programme should support access to external financing, “even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative.”

If the government retains its commitment to a market-driven exchange rate, “we believe this would be a useful shock absorber to help contain external risks in the longer term.”

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