Pak rupee has strengthened by 0.9 percent against country''s trading partners'' currencies, says SBP. The nominal effective exchange rate (NEER) has appreciated by 8.5 percent during December 2013 to May 2014. Despite Relative Price Index (RPI) decreasing by 0.7 percent, real effective exchange rate (REER) has appreciated by 8.4 percent during the same period. Although PKR has appreciated against other currencies, strengthening against the US dollar contributed mostly to appreciation in NEER, calculates SBP.
SBP warns that this appreciation could further add to the trade deficit, which continues to remain high and is a major contributor to the current account deficit. Further, says SBP, that despite continuously rising workers remittances the external account deficit witnessed a higher deficit of 2.6 billion dollars during July to May FY14 as compared to 2.2 billion dollars in the corresponding period last year.
A higher trade deficit was seen as the growth in imports (3.3 percent) outpaced growth in exports (1.3 percent). Higher oil imports and stagnant exports during the last five years have kept the trade deficit at 6.5 percent of GDP. This suggests that reducing the oil import bill could result in reducing the trade deficit to manageable levels. Non-textiles last year witnessed a decline and 75 percent of Pakistan textile exports were to the EU. New product lines need to be developed within the textile sector in addition to focusing on new areas to increase overall exports. And, new export destinations, says SBP.
Nevertheless, says SBP, the improvement in financial accounts is due to debt creating flows and not because of private financial flows or improvement in the trade deficit account. A more sustainable solution for stability in the foreign exchange market lies in the revival of private inflows and a reduction in trade deficit.