SBP imposes 100pc margin on letter on credit to discourage imports of 114 items

KARACHI: The State Bank of Pakistan (SBP) has imposed 100 percent cash margin on letters of credit (LC) for 114 goods with immediate effect to discourage unnecessary imports, a statement said on Thursday, in a move to prevent dollar outflows and further weakening of the rupee.

"The SBP has decided to impose 10 percent Cash Margin Requirements (CMR) on import of 114 items, taking the total number of items subject to Cash Margin to 525.," the bank said.

"The measure will help discourage imports of these items and thus support the balance-of-payments."

Cash margins are the amount of money an importer has to deposit with its bank for initiating an import transaction, such as opening a letter of credit, which could be up to the total value of import.

Cash margins essentially increase the cost of imports in terms of the opportunity cost of amount deposited and thus discourage imports.

The move is the second step taken in recent days by the central bank to curb imports of luxury goods. Earlier, the SBP revised prudential regulations for consumer financing prohibiting financing for imported vehicles.

The government and the central bank expressed concerns about an upsurge in the current account deficit because of the growing imports and higher oil and other commodity prices. These factors put pressure on the rupee, which depreciated by 8 percent in the first quarter of the current fiscal year.

The country's current account deficit jumped 81 percent month-on-month in August as a strong demand spurred imports, outpacing a recovery in exports. The current account deficit surged to $1.476 billion in August from $814 million in the previous month. It had posted a surplus of $255 million in August 2020.

This yawning was mainly due to higher trade deficit as imports continued to rise amid robust economic activity.

“I think it’s [imposition of CMR on some imported items] a step in the right direction to reduce imports and curtail the current account deficit,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company. "The move will also help ease pressure on the local unit."

It would be pertinent to mention here that 100 percent cash margin requirement was initially imposed, in 2017, on 404 items to discourage the import of largely non-essential and consumer goods. The list was further expanded in 2018.

However, in order to enable businesses to absorb the shocks of COVID19 pandemic, the SBP provided relief by removing CMR on 116 items.

“With economic growth having recovered and gaining momentum, SBP has decided to adjust its policy by imposing Cash Margin Requirement on additional 114 import items," the central bank said. "This will complement SBP’s other policy measures to ease the pressure of import bill and help to contain the current account deficit at sustainable levels.”

The SBP, in the last monetary policy statement in July, had estimated the current account deficit of 2-3 percent of GDP for FY2022.

At the latest policy announcement, the SBP’s governor told analysts that it is too soon to come out with revised projections for the current account as they wait and see the impact of policy interventions including the exchange rate depreciation.