EAC raises alarm over exchange rate pressure, says rupee overvalued by 4pc

ISLAMABAD: The Economic Advisory Council (EAC) has expressed apprehensions regarding the mounting pressure on the exchange rate, as indicated by the central bank’s data and the council has urged Prime Minister Shehbaz Sharif to address this issue to maintain the competitiveness of exports.

During the meeting, several members of the nine-member council pointed out the rise in the Real Effective Exchange Rate (REER)—a metric that assesses the value of a currency against the average price of a basket of foreign currencies—which reached 104.05 in January 2025.

The officials said this increase suggested the rupee was overvalued by 4 percent. A REER value of 100 signifies that the rupee is trading at a fair market value, with any deviation from this benchmark implying a misalignment with actual economic conditions.

In contrast, Deputy Prime Minister and Foreign Minister Ishaq Dar disagreed with the assessment of the REER, asserting that the rupee is undervalued by at least 15 percent. Currently, the rupee has remained stable, trading just above Rs279 to the dollar for several days.

The EAC, which is chaired by the Prime Minister, comprises members including Jehangir Khan Tareen, Saqib Shirazi, Shehzad Saleem, Musaddiq Zulkarnain, Dr. Ejaz Nabi, Asif Peer, Ziad Bashir, and Salman Ahmed.

Pakistan’s current account balances slip into deficit, threatens exchange rate stability

Furthermore, council members, many of whom are exporters, voiced their concerns that the rupee’s overvaluation was making their exports less competitive. Finance Minister Muhammad Aurangzeb assured the EAC that he would discuss the matter with the State Bank of Pakistan (SBP), the entity responsible for regulating the exchange rate.

The council also noted that Pakistan’s foreign exchange reserves have been declining, having dropped by $1 billion to $11 billion by the end of the previous week.

Despite being part of the IMF programme, the country’s foreign exchange reserves remain low due to a lack of significant new foreign inflows. The central bank has been bolstering these reserves by purchasing dollars from the market, totalling $9 billion in the last calendar year.

However, the window for such purchases shrank in January following a $420 million current account deficit reported for the country. The SBP has been acquiring dollars while retaining a portion of export proceeds and foreign remittances.

The central bank reported that restrictions on imports have been lifted, allowing for the duty-free import of cotton to meet domestic demand. There are also permits for duty-free imports of textile machinery and spare parts, as well as raw materials not produced locally.

Overall, the current account showed a surplus of $700 million during the first seven months of the current fiscal year, driven by exports amounting to $19.2 billion.