KARACHI: In order to keep the exchange rate stable and control the rising import bill, the State Bank of Pakistan (SBP) on Thursday announced a 100% cash margin (CMR) requirement on import of 114 additional items.
Pakistan’s exchange rate has been volatile in recent weeks and the Pakistani rupee continues to decline against the US dollar. The pak rupee is falling mainly due to increased imports of goods which increase the demand for the US dollar in the money market. On Thursday, the dollar was trading at Rs 170.66 on the interbank market and it jumped to Rs 172.50 on the open forex market.
The continued fall of the pak rupee against the dollar has forced the SBP to take appropriate action to keep the exchange rate stable. As a result, SBP on Thursday took another step to stabilize the volatile exchange rate and decided to impose a 100 percent cash margin (CMR) requirement on the import of 114 items. With this announcement, the total number of items subject to cash margin reached 525.
Previously, a 100% cash margin requirement was imposed on 404 items in 2017 to discourage the importation of largely non-essential consumer goods. The list was further expanded in 2018. However, in order to allow businesses to absorb the shocks of the COVID19 pandemic, SBP provided relief by removing the cash margin requirement on 116 items.
SBP requires banks to share five-day import payment schedule
SBP believed that imposing a cash margin requirement on additional items would help discourage imports of such items and thereby support the balance of payments.
As economic growth has recovered and accelerated, SBP decided to adjust its policy by imposing a cash margin requirement on 114 additional import items. This will complement other SBP policy measures to ease the pressure on the import bill and help contain the current account deficit to sustainable levels.
Black pepper, betel leaves, crushed shelled peanuts, tobacco in partial strips, vegetable fat, travel blanket / mat, special purpose motor vehicle, body parts of other vehicles, non-alcoholic beer, baby wipes, radial tires in light rubber, polished tiles, ceramics, finishing ceramics, air conditioning, color televisions, olive oil, coconut oil, frameless glass mirrors, vegetable oils, mosquito repellent coil, toilet paper / napkin, toilet paper Roll cigarettes, marble, travertine, shoes of other material, perfume spray and cut building stone are among the items on which importers will be required to pay a 100 percent cash margin.
This is the second step taken in recent days to stabilize the exchange rate and contain the demand for dollars. Recently, the SBP revised prudential regulations for consumer finance prohibiting the financing of imported vehicles and restricted banks for auto financing of imported cars.
According to the amendment, imported new and used vehicles will not be eligible for automobile financing from banks and DFIs. Cash margins are the amount of money an importer must deposit with their bank to initiate an import transaction, such as opening a letter of credit (LC), which can reach the total value of import. Cash margins essentially increase the cost of imports in terms of the opportunity cost of the amount deposited and thus discourage imports.
The State Bank’s Monetary Policy Committee, at its last meeting held on September 20, 2021, also noted that in recent months, the burden of adjusting to the increasing current account deficit has been weighing down. mainly on the exchange rate and that it was appropriate for other adjustment tools, including interest rates, also play their role.
The SBP has adopted a flexible market-based exchange rate regime since June 2019 and left exchange rates to market forces. Economists have already warned that maintaining a stable exchange rate will be a challenge for policymakers.
On a higher import bill, the country’s external account deteriorates. The current account balance recorded a deficit of $ 2.29 billion in July-August FY22 compared to a surplus of $ 838 million in the same period of the previous fiscal year (FY21).
The main reason for the increase in the current account deficit was a 68 percent jump in imports. Total imports amounted to $ 11.406 billion in the first two months of this fiscal year, compared to $ 4.6 billion for exports. The trade balance recorded a deficit of $ 6.8 billion between July and August of fiscal year 21, compared to a deficit of $ 3.4 billion during the same period of the previous fiscal year.
Copyright Business Recorder, 2021