Manufacturing: SBP allows 50 percent advance payments against letters of credit

The State Bank of Pakistan (SBP) Thursday allowed banks to make advance payment up to 50 percent of the value of imports against Letters of Credit (LCs) for manufacturing concerns.

Using this facility, manufacturing sector will be able to import plants, machinery, spare parts and raw material, etc, by making 50 percent payments in advance.

Earlier, in July 2018, keeping in view the pressures on the foreign exchange market and deteriorating balance of payments position, the SBP had withdrawn the advance payment facility allowed to importers.

Now, as the foreign exchange market is considerably eased and external account has witnessed a significant improvement, the SBP has announced that it will modify the instructions relating to advance payment facility.

"Henceforth, Authorized Dealers are allowed to effect import advance payment against irrevocable letter of credit, up to 50 percent of the value of letter of credit, for import of plant, machinery, spare parts and raw material etc. on behalf of manufacturing concerns for their own use only," a circular issued by the SBP said.

Authorized Dealers have been advised to bring the same to the notice of all their constituents and ensure meticulous compliance of above and other applicable regulatory instructions, it added.

According to the SBP, after the implementation of a market-based exchange rate system in May 2019, pressures in the foreign exchange market have eased and the balance of payments has witnessed a significant improvement as reflected in the improving current account balance, rising net foreign exchange reserves, and other indicators.

This improvement in the foreign exchange market after the implementation of the exchange rate reforms has allowed the SBP to begin relaxing the restrictions that had been imposed earlier.

Subsequently, some of the restrictions were relaxed to facilitate imports in critical areas related to medicines, education and defense while most of the restrictions were remained in place.

In November 2019, the SBP allowed advance payment up to $10,000 per invoice for import of raw material and spare parts to manufacturing concerns for their own use only.

At that time, the SBP also eased restrictions on acquisition of services from abroad, such as consultancies. The SBP believed that the current measure will support the manufacturing sector by easing restrictions on import of plant, machinery, spare parts and raw material, and related items.

The SBP said that this measure is in continuation of the SBP's efforts to reverse the earlier restrictions and facilitate and support ease of doing business in light of the improved foreign exchange and economic outlook.