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EDITORIAL: Increasing controls on L/Cs along with exchange rate restrictions on the interbank market have only compounded the problems of importers in particular. Yesterday, PKR fell 9.6% against the dollar - the biggest one-day drop in over two decades.

The growing woes of PKR have already given birth to parallel exchange markets that are strongly characterised by ever-growing gap in rates, while import allowances have become selective with a host of malpractices.

The sooner this situation is corrected, the better it is for the country’s economy. Importers’ concerns have grown manifold as the business community in a meeting with the SBP (State Bank of Pakistan) Governor expressed its deep concerns over imposition of administrative restrictions on imports. It is heartening to note that the SBP has allowed a limited-time facility (till March end) to enable importers to clear the containers stuck at ports or those consignments that have already been shipped by 18th January 2023. The facility is available for deferred payments--by 180 days or mor--and clearance of import value through funding to be arranged by the importers outside Pakistan.

However, this may tantamount to opening another Pandora’s box as it is likely to incentivise importers to use hundi/hawala channels for arranging payments outside Pakistan. Not only will that lead to higher conversion rate of imports (on open market rats), it will also be adding to inflationary pressures at home, making interbank rate ineffective for all the good and bad purposes in these cases.

Home remittances too could further drop as these hawala payments would prefer to utilise inward remittances through hundi. That would not be neutral for current account as remittances are slated to fall against some of these imports. It is important to note that remittances are already on a steep decline due to a widening gap between the open market and interbank rates.

Furthermore, in the case of settlement of import values outside the country there would be complications of booking these transactions in the importers’ accounts and may have tax implications for them. There is another problem of paying demurrages at ports and container detention charges to shipping companies that are stuck at ports.

The government can waive the demurrages and perhaps the plan is to do so. However, someone must pay for container detention as shipping companies cannot do much because they are usually owned by third parties.

That is how messy the clearance of imports is for the time being. The real issue is that SBP has almost run out of usable reserves while the external repayments continue. The only way to being anywhere close to normalcy is to get back to the IMF programme without any further loss of time.

However, even with the unlocking of IMF loan there is no surety of economic solvency or turnaround unless we reduce our expenditure in a meaningful manner. The risks of default are only going to mitigate in the short run while the medium-term risks will persist.

The good news is that the currency market is beginning to show signs of a reduction, however modest, in the gap between interbank and open market rates. This step is likely to improve inflows. Remittances may resume their arrivals through formal channels and exporters may bring to the country the proceeds that they have retained or accumulated outside.

And that could somewhat mitigate the adverse impact of blocked import payments, which have to be normalised too; but for that inflows are a must — and for that the first step is a much-needed correction in relation to the currency market.

Copyright Business Recorder, 2023

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