In a bid to curb declining forex outflows, the State Bank of Pakistan (SBP) introduces exchange controls and limited imports. What will this mean for trade and exports?
The SBP has introduced capital controls on all USD transactions worth less than $100,000.
This is one of several new measures designed to protect its forex reserves following delays to an International Monetary Fund (IMF) loan and a bullish dollar.
It has also restricted the flow of imports and limited the number of Letters of Credit (LCs) approvals and Cash Against Document (CAD) import schemes for the foreseeable future.
In a nutshell, LCs are guarantees given to traders or sellers by financial institutions that they will be paid for a large transaction. This type of payment insurance is commonly used in cross-border trade.
By contrast, a CAD scheme allows an exporter to dispatch documents such as a payment invoice through a third party such as its bank to an importer’s bank.
The importer’s bank then releases the necessary documentation to the importer once the exporter has made payment through the remitting bank.
The SBP has chosen to link the release of third-party CAD documents with its permission, in effect, delaying import clearance as a way to drip-feed the outflow of currencies like USD, which is frequently used for international transactions.
These developments come against the backdrop of a strengthening US dollar, which reached all-time highs in mid-July, and a delay in the disbursement of a $1.12 billion loan from the IMF, both of which have created uncertainty in the market.
In times of economic crisis, countries with developing economies are encouraged to introduce exchange controls by the IMF as a way to protect local currency against speculation.
Pakistan has experienced both economic and political issues in the wake of the pandemic.
It is not been good news for local manufacturers, many of whom are struggling to source raw materials for their factories.
It has also led to an increase in the number of demurrage charges they owe to port authorities due to delays in the import clearances.
This further impacts their ability to cope with the effects of rising commodity prices and soaring inflation.
Concern rises that they may not be able to absorb all the added financial challenges and production delays for much longer.
Naturally, this is adding pressure to the export supply chain and leading to fears of civil unrest, especially if factories have to close or let staff go.
A source at the Islamabad office of The Express Tribune, said, “We had hoped that all restrictions on imports would be eased after the announcement of the staff level agreement with the IMF, but it now seems that the restrictions will remain in place at least till the end of August.”
In response, a Commerce Ministry official said that the Pakistani government was reviewing the impact of its ban on imports and hoped to get some clarity from the federal cabinet as soon as possible.
Many developing countries are finding themselves in a similar position as their local currencies decline in international currency markets.
Last week, the Reserve Bank of India (RBI) took similar measures to increase liquidity in the trade finance market whilst protecting the country’s forex reserves.
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