The State Bank of Pakistan (SBP) has fulfilled a condition set by the International Monetary Fund (IMF) to reach a staff-level agreement by removing all cash margin requirements on imports. The SBP has withdrawn the existing Cash Margin Requirement (CMR) on imports from March 31, 2023, as per a circular dated March 24. The move comes as the central bank’s foreign exchange reserves increased by $280m to $4.6bn during the week ending March 17 due to inflows from China.
The SBP had previously imposed cash margin requirements under six circulars from 2017 to 2022. Cash margins are the amount of money an importer has to deposit with their bank for initiating an import transaction, such as opening a letter of credit (LC), which could be up to the total value of the import. The move is expected to discourage imports as the amount to be deposited beforehand with the bank increases the opportunity cost for importers.
Pakistan has been in a race against time to implement measures to reach an agreement with the IMF on the completion of the ninth review of a $7bn loan programme that began in 2019. The much-awaited agreement with the lender, which has been delayed since late last year over a policy framework, would not only lead to a disbursement of $1.2bn but also unlock inflows from friendly countries.
Pakistan has a severe balance of payments problem, with its forex reserves reaching critical levels in the past few months. In such a situation, the central bank had stepped in to impose different types of curbs on imports as an attempt to preserve its dollars. Past CMRs were imposed on 404 items in 2017, 131 items in 2018, and 525 items in 2021. On April 7, 2022, a 100% cash margin was imposed on 177 additional items, which hit the external account of the economy amid a ballooning import bill.
The SBP had mandated banks to obtain a 100% cash margin on all items imported immediately, leading to telecom operators reaching out for a reversal of the 100% CMR for the import of “almost all” telecom-related equipment sourced from abroad. The government relaxed the cash margins on imports from 100% to 25% and in some cases to zero in August 2022, and the standing cash margins were to remain in place until the end of the year. The timeline for maintaining CMR was extended till March 31, 2023, on December 30, 2022, by the SBP.