KARACHI: The Pakistani government has assured the International Monetary Fund (IMF) that the State Bank of Pakistan (SBP) will remove a 100 percent cash margin deposit requirement on opening of letters of credit (LCs) for importing non-essential consumer items within a year.
The IMF in its Article IV consultation with Pakistan stressed that more prominence should be given to exchange rate flexibility, rather than administrative measures, to address external imbalances.
Earlier this year, in order to reduce the pressure on dwindling foreign exchange reserves amid an import surge of non-essential items, the Central Bank imposed a 100 percent margin deposit requirement on opening of LCs for importing certain consumer items such as motor vehicles, both CBU (completely built units) and CKD (completely knocked down), mobile phones, cigarettes, jewelry, cosmetics, personal care, electrical & home appliances, and arms & ammunitions etc.
However, the IMF observed that the cash margin deposits are not remunerated and constitute an exchange restriction and multiple currency practice subject to Fund jurisdiction under Article VIII Sections 2(a) and 3 as the Fund argued that allowing for greater downward exchange rate flexibility would be preferable to administrative measures and more effective as means to strengthen Pakistan’s external position.
In this regard, the Pakistani authorities expressed their commitment to remove such restrictions within one year and their expectation that recent policy initiatives to support exports, including sales tax zero rating for export industries and duty drawbacks, would sufficiently improve the current account imbalance in the interim, said IMF in conclusive report of Article IV consultation with Pakistan.
“Macroeconomic policies should focus on bolstering external buffers and improving trade competitiveness. With Pakistan’s external position being moderately weaker than suggested by fundamentals, allowing for greater exchange rate flexibility, fiscal adjustment, and structural reforms would facilitate the building of external buffers and strengthen competitiveness”.
Exchange rate flexibility would also be preferable to administrative measures, such as the recently introduced cash margin requirement on imports, in addressing external imbalances. The IMF said that the Pakistan’s intention to remove this measure within one year is welcome, and IMF supports the Pakistan’s request for approval of retention of the exchange restriction and multiple currencies practice given that the measure has been adopted for balance of payments reasons and are temporary and nondiscriminatory.
Published in Daily Times, July 15th , 2017.
