DAWN.COM

Today's Paper | June 14, 2024

Updated 03 Sep, 2023 10:00am

Foreign banks seeking 10pc commission to endorse letters of credit

KARACHI: Foreign banks are now demanding a 10 per cent commission to endorse letters of credit (LC) for importable consignments, banking insiders revealed on Saturday.

They said the move came as the country grapples with economic challenges, diminishing the confidence of global financial institutions in its banking system.

The rupee’s depreciation, coupled with foreign exchange reserves and debt servicing issues, has elevated the business risks associated with the country.

Letters of credit issued by Pakistani banks were no longer deemed credible by international exporters, banking professionals claimed, adding that such LCs required an endorsement from globally recognised foreign banks.

“Growing risks and deteriorating economic situation has weakened the country’s image abroad. The cost is too high, as foreign banks are now asking for 10pc as commission on each consignment,” a senior banker said.

He said foreign banks had been profiting significantly from endorsing domestic LCs for over a year now, as banks in Pakistan had generally lost credibility.

Pakistan lifted import restrictions after signing a $3 billion loan deal with the International Monetary Fund in June. However, observers said the IMF’s directives under the short-term agreement to liberalise imports and uphold a uniform currency exchange rate backfired, intensifying the country’s economic woes.

Imports have suffered twofold as foreign banks raised commissions and the dollar strengthened against the rupee, inflating import expenses.

This has been manifesting in several ways; for instance, the cost of imported fuel is surging due to the dollar’s appreciation, leading to increased energy prices and a subsequent inflationary impact on poor citizens.

Analysts believe that the interim government appears ill-equipped to navigate these intricate financial dilemmas, with political instability further complicating matters.

Moreover, the rampant smuggling of commodities such as dollars, wheat flour, sugar, and fuel, alongside widespread corruption, is leading to law-and-order challenges and has become a headache for the government.

The unregulated trade in foreign currencies has allowed the dollar’s open-market rate to soar by nearly 9pc above the banking rate.

This disparity far exceeds the IMF’s acceptable threshold of 1.25pc under the loan deal, posing potential complications for the country’s economic managers when they sit with the IMF team for the upcoming bailout review.

Published in Dawn, September 3rd, 2023

Read Comments

Budget FY25 Calculator : Find out how much tax you will pay on your salary Next Story