Islamabad September 4 2022: Government of Pakistan committed with International Monetary Fund (IMF) to eliminate all remaining restrictions imposed on imports when Balance of Payment conditions permit by end June 2023.
IMF emphasize that a market-determined exchange rate remains a key tool to act as a shock absorber, especially in the context of persistent terms-of-trade shocks and low reserve buffers. Notwithstanding the recent depreciation, going forward the authorities should continue to allow exchange rate flexibility and avoid suppressing any trend movement. Allowing a greater role for exchange rate flexibility to address external pressures will thus help safeguard and improve reserve buffers towards more prudent levels in line with program targets.
As external conditions became more precarious in FY22H2, the Government of Pakistan introduced new exchange restriction and import restriction for BOP purposes; and modified one existing exchange restriction and the multiple currency practices.
Specifically, in early April 2022 the Ministry of Finance extended the set of items subject to a 100-percent cash margin requirement (CMR) on imports by 177 items, bringing the share of items covered by CMRs to about 20 percent of total import values and missing the relevant Performance Criteria on non-intensification of exchange restrictions and on non-modification of multiple currency practices.
In May 2022, the government banned the import of luxury and nonessential items to preserve FX reserves, thus breaching the PC on the non-imposition of import restrictions for BOP purposes. In addition, the authorities imposed a requirement to seek payment authorization from SBP before initiating transactions for importing certain goods, with approval granted in a discretionary manner, thereby violating the PC on the non-imposition of exchange restrictions.
Pakistan Auto manufacturer Pak Suzuki Motors and Indus Motors had closed their operations citing difficulties in importing CKDs required for assembling of cars. While Textile players also claimed hurdles in importing machinery for their expansions.
The government have partially repealed the import ban in August 2022 (leaving in place the ban on cars, mobile phones, and household appliances), and are committed to eliminate the requirement for import payment authorization at end-August 2022, depending on market conditions. Meanwhile, in early August 2022 CMRs were reduced on terms of payment above 90 days and CMRs introduced in April are set to lapse in December 2022.
Finally, Pakistan also continues to maintain an exchange restriction resulting from the limitation on advance payments for imports against letters of credit (LCs) and
advance payments up to the certain amount per invoice (without LCs) for the import of eligible items (imposed in 2018).
The Government of Pakistan noted concern about disorderly conditions in the FX market, should restrictions be removed while complementary macroeconomic policies have not yet fully kicked in.
IMF emphasized that more prominence should be given to exchange rate flexibility as means to address the BOP pressures rather than to administrative and exchange measures. Ministry of Finance requested more time to eliminate all remaining restrictions when BOP conditions permit by the new end of the program at end-June 2023.