35 percent L/C margin imposed on imports

The State Bank of Pakistan has imposed a 35 percent Letter of Credit (L/C) margin on all imports except for oil and some selected food imports effective from Friday (today) with a view to reducing the increasing trade deficit.
Earlier, there was not even a single percent margin on the L/C opening therefore a large number of the importers had been importing more goods than what they actually required. The trade deficit was also on the rise due to increasing imports, while country was also spending billions of dollars on import payments, which were directly hurting the country''s foreign exchange reserves and exchange rate.
The central bank already has tightened the limits on advance payments that were relaxed last year and now advance import payments will only be allowed against letters of credit and that too only to the extent of 50 percent, besides advance payments against contracts are not allowed any more.
Last year, advance payments against Letters of Credit and firm registered contracts were allowed to importers via banks to the extent of 100 percent. The SBP said the rising external current account deficit owing to widening trade deficit indicates that, despite a decent export performance, a significant import demand pressure existed in the economy.
Underlying this alarming trend, most worrisome is the acceleration in import demand during the first four months of 2008 that has been rising unabated over the entire fiscal year. During this period, import bill has increased by 13.4 billion dollar while export revenues grew by only 6.9 billion dollars resulting in an increment of 6.5 billion dollar in trade deficit.
Most distinct is the extraordinary growth in the non-oil and non-food imports running at 42 percent during the same period. Consequently, the external current account deficit is projected to range between 7.3 - 7.8 percent of GDP, which is much higher than the initial projection of 5 percent for FY08. This is clearly unsustainable and calls for taking urgent corrective actions, the SBP said.
However, the importers have criticised central bank''s, saying that with a 35 percent margin raw material of industry would be more expensive. "We think this is anti industry step and would cause several problems to the industry, as major industries including textile are dependent on the import of raw material," they added.