EAC Raises Concerns on Exchange Rate Pressures
On Wednesday, the Economic Advisory Council (EAC) voiced concerns regarding the increasing pressure on Pakistan’s exchange rate, urging Prime Minister Shehbaz Sharif to address the issue to maintain the competitiveness of exports.
Key Observations on the Exchange Rate:
- Some members of the nine-member EAC highlighted the Real Effective Exchange Rate (REER), which had risen to 104.05 in January 2025.
- This rise indicated that the rupee might be overvalued by 4%, as a REER of 100 reflects a fair market value for the currency. Any fluctuation above or below this level suggests the currency is misaligned with economic conditions.
Differing Views on the Rupee’s Value:
- Deputy Prime Minister Ishaq Dar disagrees with the REER, asserting that the rupee is undervalued by at least 15%. Currently, the rupee is trading above Rs279 to the dollar, with stability in recent days.
Impact on Exports:
- Some EAC members, including exporters, expressed concerns that the overvaluation of the rupee was making Pakistani exports less competitive. Finance Minister Muhammad Aurangzeb assured the EAC that the matter would be addressed with the State Bank of Pakistan (SBP).
Foreign Exchange Reserves and Deficits:
- Pakistan’s foreign exchange reserves have declined, dipping by $1 billion to $11 billion by last week’s end. This is despite the ongoing IMF program and limited fresh foreign inflows.
- The SBP has been managing reserves through the purchase of dollars, amounting to $9 billion in 2024. However, in January, the country faced a $420 million current account deficit, limiting the SBP’s ability to make further purchases.
Policy Changes and Recommendations:
- The government has removed some import restrictions and allowed the duty-free import of cotton, textiles machinery, and raw materials.
- Some EAC members recommended importing raw sugar for re-exporting after refining it, as well as eliminating sales tax on imported raw materials to support exporters.
Investments and Economic Growth:
- The prime minister emphasized efforts to make local industries more competitive internationally, with a focus on improving the overall investment environment.
- Discussions also centered around enhancing telecommunication services to boost the IT sector and freelancers in remote areas.
The EAC members expressed confidence in the government’s economic policies and made several recommendations to strengthen Pakistan’s economy. Prime Minister Shehbaz Sharif instructed relevant authorities to collaborate with the council to implement these suggestions, emphasizing the collective effort needed for economic stability and growth.