Pakistan curbs imports amid a foreign exchange crisis | World Defense

Pakistan curbs imports amid a foreign exchange crisis

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Pakistan curbs imports amid a foreign exchange crisis


http://www.atimes.com/article/pakistan-curbs-imports-to-ease-foreign-exchange-crisis/?cn-reloaded=1

The economy faces a potential collapse as foreign currency reserves fall below $9.5 billion
By FM SHAKIL JULY 19, 2018 4:26 PM (UTC+8)

The State Bank of Pakistan (SBP) has moved to curb the country’s bulging import bill to ease pressure on its dwindling foreign exchange reserves. Reserves have tumbled to US$9.5 billion, less than enough to pay for one month’s worth of imports, representing a major crisis for South Asia’s second largest economy.

Faced with a current account deficit of US$16 billion, the SBP on Monday slapped a 100% cash margin on 131 “non-essential” items to arrest the deterioration in the reserves position. The move will discourage imports as many will find it difficult with liquidity constraints to make the 100% advance payments needed for opening a letter of credit.

“Not all the classified items are non-essential as the bank claimed because it does include items which are used as raw materials and the local industries need them to keep their wheels turning,” Abdul Basit Haji Abdul Razzak, acting president of the Karachi Chamber of Commerce & Industry, told Asia Times.

Such goods include air conditioning parts, gum base for chewing gum, compressed natural gas (CNG) kits, bike saddles, data-processing equipment, vehicle-suspension shock absorbers, evaporators, sealed-beam lamp units, auto bulbs and a host of other items the bank deemed as critical raw materials used by local industries.

An SBP source told Asia Times that restrictions on imports were necessitated by “a run on the fast depleting reserves” of the country. “The situation will go from bad to worse when external repayments worth $12.7 billion become due in 2019,” he said, adding that this year the country has made repayments totaling $7.7 billion.

He claimed that if the 100% cash margin requirement imposed by the central bank did not work, then it might impose a total ban on the import of machinery and infrastructure goods. That would hamper the import of components needed for the multibillion-dollar China-Pakistan Economic Corridor (CPEC) project.

Last month, Pakistan succeeded in getting a Chinese loan of US$1 billion to prop up its tumbling foreign-currency reserves. The fresh loan increased China’s disbursements to Pakistan during the fiscal year ending June 2018 to US$5 billion. Earlier, China extended Pakistan US$1.5 billion in bilateral loans and US$2.9 billion through Chinese banks.

The CPEC has become an Achilles’ heel for the Chinese government with Pakistan’s persistent demand for loans to boost its reserves position. Pakistani officials have reportedly warned their Chinese counterparts that if its lending stops, the future of the CPEC will be in jeopardy.

China has reciprocally warned that if Pakistan is forced to approach the International Monetary Fund for a bailout, they will have no option but to release details of how the project was funded, and even discontinue some of the infrastructure projects already planned.

In a related development, a currency-swap deal with the People’s Bank of China has recently been doubled up and the SBP is now encouraging commercial banks to make yuan-based transactions with their Chinese counterparts.

“The Chinese initiative to replace the US dollar with Chinese currency is not going to click [for] various reasons, and the lack of interest on the part of local banking companies is one of them,” Muhammad Ishaq, a leading manufacturer and onetime director of the Khyber Pakhtunkhwa Board of Investment & Trade, told Asia Times.

Ishaq, who is also an importer from China, revealed that the commercial banks were reluctant to trade in yuan, which they think lacks stability compared with the US dollar.

“Unfortunately, in its craze to shore up foreign-exchange reserves and avoid a crisis, the central bank hit the small importers hard by withdrawing advance payment facilities. These items are required by cottage industries for imports without opening a letter of credit or bank guarantee,” he said.

Ishaq also said that small and cottage industries would suffer a great deal on this count. The Pakistan Leather Garments Manufacturers and Exporters Association, he said, has already opposed the SBP’s step, which will negatively impact trade and the economy.

In order to avert a full balance of payments crisis, the central bank quietly devalued the Pakistani rupee by 5.3% to 128 against the dollar on Monday. It was the fourth downward adjustment in the exchange rate since December and comes within days of increasing the policy interest rate by 100 basis points (1 percentage point) to address the rising challenge of stabilizing the economy.

In its quarterly report, “The State of Pakistan’s Economy” released on July 13, the central bank revealed that despite a recovery in exports and remittances, the current account deficit surged to US$12.1 billion in March because of rising global oil prices and higher transport and machinery imports for CPEC-related projects.

The SBP report noted that financial inflows in the last fiscal year had failed to finance the current account deficit, which led to a drop in SBP reserves and a 9.6% depreciation in the exchange rate in financial year 2017-18.

“On the external front, there is a need to arrange external financing in the short term and resolve structural issues affecting competitiveness in the medium and long terms,” the report acknowledged.
 
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