Pakistan’s external sector has come under renewed focus after the country’s Real Effective Exchange Rate (REER) climbed to its highest level in more than seven years. The index reached 105.17 in March 2026, raising concerns about the country’s ability to stay competitive in global markets.
The REER is a key indicator used to assess a country’s currency strength against those of its major trading partners, while adjusting for inflation. When the index rises above 100, it generally means that a country’s goods are becoming more expensive relative to others. In Pakistan’s case, the current reading suggests that exports are losing price advantage in international trade.
This increase is not just a short-term fluctuation. On a monthly basis, the index rose close to 2 percent, while it also recorded a steady year-on-year increase. Such a consistent upward trend indicates deeper underlying factors at play, including persistent domestic inflation and relatively limited depreciation in the currency.
Although the REER crossing 100 does not automatically mean the currency is misaligned, it does highlight a shift away from competitiveness. The current level is also higher than the long-term average, strengthening the view that the rupee may be overvalued in real terms.
A higher REER can create multiple challenges for the economy. Export-oriented industries may find it harder to compete internationally as their goods become more expensive. At the same time, imports become relatively cheaper, which can increase demand for foreign goods and widen the trade deficit. These pressures can ultimately affect foreign exchange reserves and economic stability.
Interestingly, the Nominal Effective Exchange Rate (NEER), which measures the currency without adjusting for inflation, tells a slightly different story. While it has shown a small increase on a monthly basis, it has declined compared to last year. This suggests that although the rupee has weakened somewhat in nominal terms, it has not depreciated enough to offset the impact of higher domestic inflation.
Looking ahead, many analysts expect the exchange rate to gradually adjust. Forecasts indicate that the rupee could move toward the range of Rs280–282 per US dollar by the end of the fiscal year. Such a shift would help bring the REER down, making exports more competitive and reducing pressure on the external account.
However, currency depreciation comes with its own risks. A weaker rupee can lead to higher import costs, which may fuel inflation, especially in essential sectors like energy and food. Policymakers therefore need to carefully manage this balance between improving competitiveness and maintaining price stability.
In the bigger picture, the rise in REER serves as a warning sign for the economy. It highlights the importance of not relying solely on exchange rate movements, but also focusing on structural improvements such as boosting productivity, controlling inflation, and expanding the export base.
Overall, Pakistan’s current REER trend points to the need for adjustment. Whether through gradual currency depreciation or broader economic reforms, addressing this imbalance will be crucial for strengthening export performance and ensuring long-term economic resilience.