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SBP takes measures to restrict dollar outflow

SBP has directed commercial banks to take approval prior to initiating import transactions worth $100,000 to restrict the outflow of dollar

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With the perspective of restricting dollar outflow and conservation of depleting foreign exchange reserves amid IMF loan indecision, commercial banks have been directed to take State Bank of Pakistan’s (SBP) approval prior to initiating import transactions worth $100,000, sources revealed to The News.

Read more: Dollar climbs again, hits Rs.183.30

A banking source acquainted with the development said, “Earlier, banks were needed to inform the SBP if they wanted to start processing the trade documents such as a letter of credits (LCs), other papers and making payments for the imports of certain goods worth $500,000.”

The source added, “It seems the central bank wants to discourage imports to save cash as banks are facing a dearth of dollars following a sharp depletion in the foreign currency reserves.”

As of June 10, the central bank’s reserves had dropped by $241 million, or 2.6 percent, to $8.98 billion, enough to cover 1.32 months’ worth of imports. The SBP, on the other hand, stated that banks were still able to make import payments.

While responding to a question, the central bank said, “Even today, roughly about $200 million import payments have been executed. SBP has, however, required prior approval before the opening of LCs or registration of contracts for certain types of imports like Cars (CKD) [completely knocked down], cell phones (CKD) and certain types of machinery. But these instructions were issued on May 20 and not today.”

The SBP lacks the necessary resources to exert market control. Particularly end-of-June related, it is leaning into commercial banks’ share of reserves to make payments, resulting in low or negative swap premiums, due to low inflows and considerable outflows.

An analyst said, “The situation is grave, but we have been in such scenarios before. This week is critical. If we get a deal with the IMF, things will get back in place.” The SBP is considering some strategies for increasing dollar liquidity in the foreign exchange market.

The sources also shared that the SBP may alter the cash reserve requirement (CRR) of banks in terms of dollars, requiring banks to deposit 10% of their dollar accounts with the SBP. By October, again the banks will deposit CRR with the SBP. “These are just the options, and the central bank will notify banks through a circular if it takes any decision in this regard,” sources confided to The News.

In May, the current government banned the import of luxury and non-essential goods. This decision was made considering the dollar’s slippage, soaring current account deficit, and shrinking foreign currency reserves.

Read more: Government to impose ban on import of luxury products

Trade deficit of Pakistan expanded by a staggering 57.85% year-on-year to the highest at $43.33 billion over the 11 months period of this fiscal year driven by greater imports. The import bill grew by 44.28% to $72.18 billion in (July to May) FY2022. On the other hand, exports grew only by 27.78% to $28.84 billion.

The expanding current account deficit and growing external debt repayments imply greater pressure on the forex reserves. It is quite worrisome for the balance of payments that are pulling the currency to historical low levels. Due to declining reserves, the SBP has no sufficient ammunition to protect the rupee.

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