Cash margin for LC opening to go up

Published September 26, 2021
The SBP had recently decided to slow down the import growth with changes in prudential regulations. — Reuters/File
The SBP had recently decided to slow down the import growth with changes in prudential regulations. — Reuters/File

KARACHI: Rising pressure of import bill is expected to increase the cash margin for opening Letter of Credit (L/C) for imports soon, said sources in the banking sector.

The State Bank of Pakistan (SBP) had recently decided to slow down the import growth with changes in prudential regulations and reduced the financing particularly for imported vehicles. During July-Aug FY22 the import of vehicles was of $495 million compared to $160m in the same period of last year.

“The SBP has not much option but to make a big cut in the import bill by introducing higher cash margin on opening of L/Cs for import,” said a senior banker, adding that the current cash margin is different for various imports but was eased due to Covid-19.

The banking sources said that 100 per cent cash margin is expected to curb imports which have severely shaken the exchange rate and depleted the foreign exchange reserve of the country.

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

The SBP said at that time that considering the challenges posed by the Covid-19 pandemic to the manufacturing sector and other economic segments, and on the representations made by various businesses and associations, it has re-evaluated the cash 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 a further 131 items, with a view to containing mostly the import of consumer goods and to allow room for the import of more growth-inducing items.

However, the initial imposition of 100pc cash margin supported the government to bring down the import growth and reduced the current account deficit to $1.82bn in FY21 from about $20bn in FY18.

But the Covid-19 pandemic forced the government to ease the situation for higher import. The SBP was of the view that the removal of the cash margin requirements on certain items will support businesses’ cash flows and liquidity that will benefit the economy.

The banking sources said there was no idea that how and when the cash margin would be introduced but said it was necessary to bring down the import growth which reached $6.007bn in August FY22 while the collective inflows of remittances and export proceeds were lower than the import.

The export proceeds in August was $2.4bn while the remittances were $2.66bn making it $5.06bn reflecting the current account deficit of $1.5bn.

Due to the rising current account deficit the exchange rate had grossly weakened the local currency against the US dollar as it lost Rs17 per dollar during the past four months.

Published in Dawn, September 26th, 2021

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