KARACHI: The State Bank of Pakistan (SBP) has imposed 100 per cent cash margin on another 114 items to curb their imports which have grossly destabilised the exchange rate and widened both trade and current account deficits.
The sharp rise in the current account deficit (CAD) and steep fall of the rupee against the US dollar forced the economic managers to bring down the import bill which rose to over $6 billion in August. The SBP said the measure will discourage imports of these items and thus support the balance-of-payments.
“It has been decided to impose 100 per cent Cash Margin Requirements (CMR) on import of another 114 items, taking the total number to 525,” said a circular issued by the SBP on Thursday.
The government look worried about sharp increase in the CAD that had widened to $1.5bn in August against $838m in July.
The rising twin deficits jolted the exchange rate while the local currency lost over 11.5pc against the US dollar since May 7. The day-to-day appreciation of the dollar caused the importers to book more and more for their future payments.
Cash margins are the amount of money an importer has to deposit with their bank for initiating an import transaction, such as opening a letter of credit (LC), 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 SBP said that 100pc 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 Covid pandemic, the SBP provided relief by removing CMR on 116 items.
“With economic growth having recovered and gaining momentum, the SBP has decided to adjust its policy by imposing CMR on additional 114 import items. 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,” said the SBP.
The sustainable level of CAD was not mentioned, but SBP Governor Dr Reza Baqir had earlier said that the deficit could be in the range of 2 to 3pc of GDP in FY22. However, the current trend indicated that the CAD could be much larger than the estimated number.
The SBP said that the 100pc cash margin requirement is the second step taken in recent days, in this regard. Earlier, the SBP made changes to prudential regulations to effectively prohibit financing for imported vehicles, and tighten regulatory requirements for financing of domestically manufactured or assembled vehicles of more than 1000cc engine capacity and other consumer finance facilities like personal loans and credit cards, it added.The central bank said the targeted step will help to moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments.The circular issued on Thursday said that it has been decided to waive the condition of 100pc cash margin requirement on imports made against air pumps and gas compressors.
Published in Dawn, October 1st, 2021