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To avoid further declines in foreign currency reserves, the State Bank of Pakistan (SBP) has begun choking outflows of dollars of less than $100,000, revealing many factories to the risk of closure and monetary penalties. According to the sources, the central bank"s restrictive measures are part of a series of capital controls that Pakistan is implementing to avoid a default-like situation caused by the International Monetary Fund"s (IMF) delay in approving and disbursing a $1.12 billion loan tranche.

On Monday, the federal govt also did not lift a two-month import ban, implying the gravity of the scenario. According to industry sources, the SBP discourages imports made through Letters of Credit (LCs) and against open accounts, such as Cash Against Document (CAD) import schemes. In the CAD scheme, the export industry presents an invoice and sends documents to the importer"s bank via its bank. The documents are delivered to the importer by the importer"s bank only after the exporter has been paid by the remitting bank.

However, the SBP has now tied the release of these documents to its authorization, delaying import clearance in order to save money. Many industries are currently facing raw material shortages and are on the verge of cutting production. Factories that import raw materials for the production of food, medicines, and iron are currently facing severe supply constraints. "We imported raw material from Dubai to ensure the smooth operation of our operations, but due to the non-release of our import documents and, as a result, the mill is on the verge of closure," said Ibrahim Tariq Shafi, Executive Director of Ittefaq Iron Industries Limited.

Shafi stated that his company has already paid Rs7.5 million in deferred payment charges to the port operators as a result of the central bank"s delay in clearing their imports. According to the Statistics Bureau, the Largescale Manufacturing Index (LSMI) output fell 1.3 percent in May compared to April, indicating that industries are beginning to feel the effects of contractionary measures. According to the PBS, the LSM increased 11.7 percent from July to May 2021-22 compared to the same period last year. Details revealed that the central bank was refusing to clear import documents even when the amount was as low as $33,571.

As of July 5, about 15 consignments of Ittefaq mill worth a total of $2 million were obstructed at the ports. Only four consignments were approved by the central bank, two of which were cleared this week. According to Ibrahim, no foreign provider will agree to do marketing with us or others under the cash against document scheme, which will have a negative impact and lead to the closure of all import-based industries importing raw materials under this scheme rather than a letter of credit. For the production of steel, the company imported products scrap and ferro. Local banks have been informing their customers that even small amounts, such as $100,000, cannot be resolved in bulk in individual categories. According to the SBP"s instructions to the bank, each company can only obtain one document worth less than $100,000 per day.

"We had hoped that after the declaration of the staff level agreement with the IMF, all import restrictions would be lifted, but it now appears that the constraints will remain in place at least until the end of August," a person directly involved in decision making told The Express Tribune. The IMF will be on leave beginning next month, and Pakistan will be expected to accomplish all prior actions, which will take time. The government appears to have few options other than to wait for the IMF tranche.

And the IMF was waiting for notification of an increase in electricity prices, as well as whether the government could arrange $4 billion to link the financing gap against this fiscal year"s $35.1 billion needs. The IMF will not consider Pakistan"s case for approval unless it receives assurances of $4 billion in additional funding. Markets have once again panicked following the PML-defeat N"s in Punjab, and the rupee has suffered its largest single-day loss in nearly two and a half years. On Monday, the rupee closed at Rs215.20 to the dollar in the interbank market, a loss of Rs4.25 in a single day. Pakistan"s gross official foreign currency reserves remained at $9.7 billion as of July 7th, barely enough for seven weeks of imported goods at their current level.

This is regardless of the fact that the central bank does not permit free dividend repatriation. The federal govt had also placed a ban on imports of approximately 41 dozen goods, as well as barriers and restrictions on other items such as automobiles and cellphone parts. The federal government has yet to lift a two-month-old ban on the importation of these goods. According to a Commerce Ministry official, the government is reviewing the impact of the import ban and will soon present a summary to the federal cabinet for a decision.