KARACHI: The State Bank of Pakistan (SBP) on Friday reversed the cash margins on imports from 100 per cent to 25pc and in some cases to zero, showing the strength of confidence of the policymakers hoping for a better outcome of negotiations with the International Monetary Fund (IMF) and friendly countries.

“To provide relief to importers, the SBP has significantly reduced cash margin requirements on deferred payments. Cash margin will be 25pc for payments from 91 to 180 days and 0pc for payments beyond 180 days instead of the previous requirement of 100pc,” the SBP said.

On April 8, the SBP imposed a 100pc cash margin on imports to discourage them, which drastically hit the external account of the economy amid a ballooning import bill. The central bank imposed 100pc cash margins on 177 items to reduce imports, easing pressure on the rupee and narrowing trade and current account deficits.

According to the April circular, banks must obtain a 100pc cash margin on all items imported immediately. The cash margins on these specific items will remain in place until the end of this year.

The current government, which just a few days ago was facing a serious threat of a country’s default on external payments, took the daring step of reducing the cash margin to the lowest level.

The fiscal year FY22 ended on June 30 and recorded a total import bill of goods and services of $84 billion, with a trade deficit of about $48bn and a current account deficit of $17.4bn.

The huge import bill was held responsible for the current account deficit, which pushed the country close to default level.

However, the situation has yet to change as the country has yet to receive a single dollar from the IMF or friendly countries.

The claims of the finance minister played a key role in bringing down the dollar value in the currency market, and the speculative part of the exchange rate vanished in a single session as the dollar lost over Rs9 two days ago.

The exchange rate is in favour of the rupee, but the local currency is recovering slowly compared to the massive loss against the US dollar during FY22 and the over 13pc devaluation of the rupee in July alone.

The rupee recovered about 4.2pc against the US dollar over the last six sessions; it was a good performance, but it still relies on promises sold by the finance minister.

However, a 47pc drop in the trade deficit in July encouraged both the rupee and policymakers to allow imports with the lowest cash margins.

When a 100pc cash margin was introduced in April, the import bill for July-March 2021-22 (9MFY22) rose by 49pc to $58.7bn. Since January 2022, the currency has depreciated by 6.2pc due to the widening current account gap. In 9MFY22, it fell by 16.28pc.

Analysts and economists suggest that there must be a balance in trade, but imports are a complex subject in Pakistan. Exporters are also in favour of imports as they use over 30pc of imported constituents for their exportable goods. The government fears that with a slash in imports, exports will also decline; the government does not want to see exports fall.

According to the SBP circular, the cash margin requirements will apply to the PKR equivalent amount of the import transaction.

“It may be noted that the above instructions shall apply to all new import transactions initiated by the bank after the issuance date of this circular letter,” said the SBP circular. “However, on already initiated import transactions, the instructions may only be applied if the amendments (in terms of payment) are made subsequent to the date of the issuance of the instructions,” the circular said. The cash margins deposited by importers on all items would be non-remunerative, it added.

Published in Dawn, August 6th, 2022