SBP tightens transaction limit to avoid dollar shortage

• SBP takes steps to ensure there's no shortage of dollars.
• Asks banks to seek permission before initiating import transactions worth $100,000.
• If we get a deal with the IMF, things will get back in place, says analyst. 

KARACHI: Commercial banks have been asked to seek State Bank of Pakistan’s (SBP) permission before initiating import transactions worth $100,000 in an attempt to ease dollar shortages and conserve eroding foreign exchange reserves amid IMF loan uncertainty, sources confided to The News.

“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,” a banking source familiar with the development told the publication on Monday.

“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,” the source added.

The reserves held by the central bank fell by $241 million or 2.6% to $8.98 billion as of June 10 — a cover for 1.32 months’ of imports. The SBP, however, said it had not stopped banks from making import payments.

“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 central bank said responding to a query.

The SBP does not have the resources to control the market. With low levels of inflows and substantial outflows, especially end-of-June related, it is dipping into commercial the bank’s share of reserves to square payments, resulting in low or negative swap premiums.

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, said an analyst. The SBP is looking at some options to improve the dollar liquidity in the forex market.

The SBP may reverse the cash reserve requirement (CRR) of banks in terms of dollars and banks have to deposit 10% of dollar accounts with the SBP, according to sources.

The banks will again deposit CRR with the SBP by October. “These are just the options and the central bank will notify banks through a circular if it takes any decision in this regard,”

The coalition government imposed a ban on the import of luxury and non-essential items in May. This decision was taken in the light of dollar slippage, rising current account deficit and falling foreign currency reserves.

The country’s trade deficit widened by an alarming 57.85% year-on-year to an all-time high at $43.33 billion during the 11 months of this fiscal year fueled by higher imports.

The import bill increased 44.28% to $72.18 billion in (July to May) FY2022. Exports increased 27.78% to $28.84 billion.

The widening of the current account deficit and increasing external debt repayments indicate increased pressure on the forex reserves, adding to worries about the balance of payments that are dragging the local currency to record lows. With the falling reserves, the SBP has no ample ammunition to defend the rupee.

Originally published in The News