SBP imposes 100 pc cash margin on 114 imported items – Journal

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KARACHI: The State Bank of Pakistan (SBP) imposed a 100% cash margin on 114 other items to curb their imports, which severely destabilized the exchange rate and widened trade and current account deficits.

The sharp increase in the current account deficit (CAD) and the sharp decline of the rupee against the US dollar forced policymakers to cut the import bill which stood at more than $ 6 billion in August. The SBP said the measure would discourage imports of these items and thus support the balance of payments.

“It was decided to impose 100% cash margin (CMR) requirements on the import of 114 other items, bringing the total to 525,” a circular issued by the SBP said Thursday.

The government seems worried about the sharp increase in the CAD, which widened to $ 1.5 billion in August from $ 838 million in July.

Growing twin deficits rocked the exchange rate as the local currency has lost more than 11.5% against the US dollar since May 7. The daily appreciation of the dollar has caused importers to reserve more and more for their future payments.

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 SBP said a 100pc cash margin requirement was initially imposed in 2017 on 404 items to discourage the import of largely non-essential consumer goods. The list grew further in 2018. However, in order to allow companies to cushion the shocks of the Covid pandemic, the SBP provided relief by removing the CMR on 116 items.

“With economic growth having picked up and accelerating, the SBP has decided to adjust its policy by imposing the CMR on 114 additional import items. This will complement other SBP policy measures to ease import bill pressure and help contain the current account deficit to sustainable levels, ”the SBP said.

The sustainable level of DAC was not mentioned, but SBP Governor Dr Reza Baqir previously said the deficit could be in the range of 2-3% of GDP in FY22. However, the current trend has indicated that the DAC could be much larger than the estimated number.

The SBP said the 100pc cash margin requirement is the second step taken in recent days, in this regard. Previously, the SBP had made changes to prudential regulations to effectively prohibit the financing of imported vehicles and tighten regulatory requirements for the financing of domestically manufactured or assembled vehicles with a cylinder capacity greater than 1,000 cc and other facilities. consumer finance like personal loans and credit cards, he added. The central bank said the targeted step would help moderate demand growth in the economy, leading to slower import growth and thus supporting the balance of payments. The circular published on Thursday indicates that it has been decided to lift the condition of 100 pc in cash. margin requirement on imports made against air pumps and gas compressors.

Posted in Dawn, October 1, 2021

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