Tashkent, Uzbekistan (UzDaily.com) -- Competitiveness is the degree of cheapness of traded goods produced in the country than in the countries of trading partners. The degree of competitiveness is influenced by the price of goods sold domestically and in partner countries, as well as the nominal exchange rate.

At a constant exchange rate, an increase in domestic prices for domestically produced goods reduces and an increase in prices for these goods in partner countries, on the contrary, increases the country’s competitiveness.

The nominal exchange rate is the rate that is published in the media and at which currencies are exchanged between countries.

As of March 2022, the nominal exchange rate of the soum against the US dollar was approximately 11.4 thousand soums. Returning to the above, if the price level remains unchanged within the two partner countries, the depreciation of the national currency will lead to an increase in the country’s competitiveness. For example, if the price of a product is 23 thousand soums, at the current rate it will cost 2 dollars, and at the rate, for example, 15 thousand soums for 1 dollar, it will cost 1.5 dollars.

In practice, an indicator is used that combines all of the above points - the real exchange rate.

The real exchange rate is the nominal exchange rate adjusted for the rate of inflation in the two partner countries. Therefore, it shows a real picture of changes in the degree of cheapness of goods in the market of the partner country.

In fact, countries have several trading partners. The national currency can strengthen against the currency of one partner and depreciate against the other.

The nominal effective exchange rate measures how much a country’s exchange rate has changed relative to the rates of all its trading partners. However, changes in the nominal effective exchange rate do not fully disclose the purchasing power of the currency, since it does not take into account changes in prices for goods within partner countries.

Therefore, the real effective exchange rate (REER) is calculated. This is the nominal effective exchange rate adjusted for inflation in all partner countries. Therefore, an increase in a country’s real effective exchange rate indicates that its exports are becoming more expensive and its imports are becoming cheaper.

From September 2019 to February 2022, the change in the REER index reached 14.9%, with a sharp increase in the period January-February 2022 (from 7.2% to 9.6% and 14.9%, respectively). The main factors behind such a sharp appreciation are the prolonged weakening of the Turkish lira (a sharp devaluation of the lira by 40% in November 2021), as well as the fall of the ruble in February 2022 by 22%.

Looking at the monthly change in the REER, one sees an increase to 7.4% (up – soum appreciation, decline - depreciation of the soum against a basket of currencies in real terms) in March 2020, followed by a correction in April 2020 (-5.4%). Accordingly, following the increased real appreciation of the sum (14.9%) in February of this year, an adjustment is expected in relation to trading partner countries in subsequent periods.