Rising cash margin for LC opening – Journal

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KARACHI: The growing pressure from the import bill is expected to increase the cash flow for the upcoming opening of letters of credit (L / C) for imports, banking sources said.

The State Bank of Pakistan (SBP) had recently decided to slow the growth of imports with changes in prudential regulations and cut funding especially for imported vehicles. In July-August FY22, vehicle imports amounted to $ 495 million compared to $ 160 million in the same period last year.

“The SBP has no choice but to dramatically reduce the import bill by introducing a higher cash margin when opening import letters of credit,” a senior banker said, adding that the current cash margin is different for various imports but was lightened due to the Covid-19.

Bank sources said a 100 percent cash margin is expected to dampen imports which have severely shaken the exchange rate and depleted the country’s foreign exchange reserves.

Following the emergence of Covid-19 in March 2020, the SBP in the last week of September last year relaxed the 100% cash margin requirement on the import of certain raw materials to support the manufacturing and industrial sectors.

The SBP said at the time that given the challenges posed by the Covid-19 pandemic to the manufacturing sector and other economic segments, and on representations made by various companies and associations, it reassessed the margin requirements. and decided to remove this requirement on 106 items / HS codes.

The cash margin condition was initially imposed in 2017 on 404 HS codes and later in 2018 on 131 other items, with a view to mainly contain the import of consumer goods and to leave room for the import of more growth-promoting articles.

However, the initial imposition of a 100% cash margin helped the government slow import growth and reduce the current account deficit to $ 1.82 billion in FY21, from about $ 20 billion in fiscal year 18.

But the Covid-19 pandemic has forced the government to ease the situation for an increase in imports. The SBP believed that removing cash margin requirements on certain items will support cash flow and liquidity for businesses that will benefit the economy.

Bank sources said there was no idea how and when the cash margin would be introduced, but said there was a need to curb import growth which reached $ 6.007 billion in August FY22 then that collective inflows of remittances and export products were lower than imports. .

Export proceeds in August were $ 2.4 billion while remittances were $ 2.66 billion, or $ 5.06 billion, reflecting the current account deficit of $ 1.5 billion .

Due to the increasing current account deficit, the exchange rate has severely weakened the local currency against the US dollar as it has lost Rs 17 per dollar in the past four months.

Posted in Dawn, le 26 September 2021


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