Banks Ordered to Arrange Dollars Before LCs Opening

Banks have been asked to arrange US dollars before opening letters of credit (LCs) to allow for a 25 percent increase in imports. The State Bank of Pakistan (SBP) has requested banks to arrange dollars before issuing LCs, according to Dawn. Previously, importers were given the burden of arranging dollars for the opening of LCs to import raw materials, which helped industries but also reinforced the underground market for dollars. Earlier this year, importers began acquiring dollars from undocumented channels at higher prices which widened the interbank-open market gap, forcing remittances to decline, while export earnings were exchanged in the black or hoarded for higher returns. Banks will likely be unable to increase their dollar reserves for the time being, implying that imports will remain constrained. If the IMF board starts releasing the $3 billion bailout this month, the central bank’s reserves may improve but trade numbers will continue to exhibit weak trends unless improvement on a massive scale is observed this fiscal year. Currently, SBP has eased import controls by withdrawing all restrictions for essential and non-essential goods, in tandem with prior conditions of the IMF funding facility.