Non-Opening LCs / Letter of Credit Issue in Pakistan: A Threat to Industries?

For several weeks, many of us have heard about LCs (letter of credit) issues. But most of us are not fully aware of the issue and its impact. It is important to see how this issue is affecting people and businesses and which sectors are or may get affected soon. For this purpose, we are here with the impacts of the Letter of credit issue in Pakistan on major industries and businesses.

What is Letter of Credit?

Before we start explaining the issue, we have to understand the LC (letter of credit). In simple words, an LC or letter of credit is a guarantee from a bank. It ensures that the bank will pay for goods or services (when importing), as long as certain conditions are met. It is used in international trade to ensure payment between buyer and seller.

LC / Letter of Credit Issue in Pakistan

Now you know what a letter of credit is, it is time to understand the LCs issue in Pakistan. Due to the worsened economic conditions and shortage of US Dollars in the country, the State Bank of Pakistan (SBP) introduced a new policy of “prior approval for imports” last year. Due to this, companies and businessmen couldn’t directly get LCs from banks without taking prior approval. 

Many will find no issue in this process. But the problem arises when the approvals are delayed. As reported by different media outlets, businesses are facing difficulty in obtaining approvals due to the shortage of dollars. As a result, many businesses have not been able to import items (raw materials, equipment, etc.) which is disrupting their supply chain. Due to this, many are forced to shut down their operations for the time being.

Now you understand the issue, it is time to see the impact of this issue on different industries and businesses. 

Impact on Mobile Phone Industry

The issue of LCs / import restrictions in Pakistan has also affected the mobile phone industry. Since last year, many mobile companies have established their production plants for the assembly of mobile phones in Pakistan. It was done to avoid the heavy taxation and duties on imported mobile phones. But now, some media outlets are reporting that mobile phone companies are also facing difficulty in importing the parts for phone assembly. 

One media outlet even reported that the major mobile companies may shut down their assembly in Pakistan (due to a shortage of raw materials which disrupts their supply chain). The major mobile brands include Samsung, Xiaomi, Vivo, Infinix, Realme, etc. This news is not confirmed by the companies’ officials though.

If the news is correct and companies suspend their assembly due to this issue, they will have to import CBU mobile phones (if allowed). As a result, the prices of mobile phones will increase due to the heavy duties on CBU mobiles. Also, the prolonged suspension of assembly may force the companies to fire their employees resulting in around 40,000 job losses. If import of CBU mobiles isn’t allowed, the prices of used mobile phones will jump.

Impact on the Construction Industry

Just like other industries, the construction industry may get a major impact soon if the LCs issue isn’t resolved. As per a report, the import of steel scrap is down by a record 55% year-on-year for December. It is the sharpest year-on-year drop to date in the last 10 years. There are 44 allied industries that depend on steel supply.

If the issue isn’t resolved, it is estimated that around 7.5 million jobs will be lost due to the closure of factories (a report suggests). The construction industry will be one of the most affected industries due to this as steel is a major raw material in construction. 

Impact on Food Industry

According to a report by a media outlet, the edible oil industry has raised concerns over the LCs issue and requested SBP to allow LCS opening to import edible oil. In case the issue is taken for granted, we may even face a crisis of banaspati ghee (hydrogenated oil) and cooking oil shortage. Edible oils are used in numerous food items. This problem may turn into a food crisis if not taken care of. 

Impact on Health Sector

Here is another piece of bad news. The LCs issue may also impact the health sector if left unnoticed. As per a news outlet, “there is a shortage of raw materials and medical equipment used in the manufacturing of medicine” – Dr Shahid Rasheed Butt (Former President of Islamabad Chamber of Commerce and Industry (ICCI)). 

He also said that there was a shortage of items used in laboratory tests, surgical instruments and other items resulting in problems.

As per a different report, leading transplant centers had to stop performing kidney, bone marrow and liver transplants due to the LCs issue. The reason behind this is the unavailability of a critical imported medicine used to prevent the body from rejecting any transplanted organ. 

Impact on Energy Sector

Pakistan’s mining industry is also getting affected due to the import restrictions and non-opening of LCs. As per a report, critical spare parts and operational equipment are stuck at ports. If those parts and equipment are not released, it can threaten the energy sector of the country. We know that Pakistan gets a major portion of its electricity from the Thar Coal mine and its power projects. If this issue persists, we may face more power outages. It may give a boost to the sale of Solar Panels in Pakistan.

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Impact on Automobile Industry

We have seen that the Letter of Credit issue in Pakistan has impacted the automobile industry severely (due to its major dependence on imported raw materials). We have seen reports of the Suzuki plant shut down and the Toyota plant shut down recently. The reason mentioned by both companies was the disruption of the supply chain due to late approvals/import restrictions. After that, we have also seen its impact on the bike industry as Suzuki suspended bookings for its motorcycles for an indefinite time.

These were the major impacts of this issue on the automobile industry. But, there is another perspective as some media outlets have reported that nearly $1.2m worth of luxury cars were imported in November 2022 alone. These vehicles include Lexus, Land Cruisers, Prado, etc. 

Another report suggests that 43 luxury cars and EVs were imported in Dec-2022. These reports show that the import restriction is mainly hurting low to medium-income people as the elite class is still getting the luxury items they want. 

According to a different report, Pakistan imported vehicles (including parts) worth around $1.2b in just 6 months despite restrictions.

On the other hand, the sales of cars and bikes are declining as we can see in the reports mentioned below. If we add the non-production days, the sales of bikes and cars are expected to decline further. All these events show that the issue is hurting the automobile industry severely.

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If this issue continues, we may see more non-production days and booking suspensions in near future.

In a recent development, the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) and the Pakistan Automotive Manufacturers Association (PAMA) sent a joint letter to the Governor State Bank of Pakistan (SBP). In the letter, they showed fear of the automobile industry’s extinction due to the restriction and lack of cooperation by banks. As per them, this situation is causing closures of factories and many assemblers are laying off their employees as well.

They also cited data from the Pakistan Bureau of Statistics (PBS), which shows that the car assembly kit imports have decreased by 38% in the first half of the fiscal year 2022-23, compared to the same period of the previous fiscal year (2021-22). As a result, a massive decline in automobile companies’ sales and profit have been noticed.

They have warned that if nothing is done to make the situation better, it may result in unemployment, closure (short or long-term) of assembly plants, and government revenue.

Who’s at Fault?

Many will think that only the government is at fault. But it’s not true. The automobile companies (both car and bike brands) have been operating in Pakistan for decades. It is a failure that they haven’t localized the production (including raw materials). They are basically assembling the cars and bikes and most of the parts are imported. With years of generating huge revenues, if they had started the production of the raw materials locally, it could’ve saved them in this tough time.

Do you think that the automobile companies are equally responsible for the crisis in the automobile industry? Share your thoughts in the comment section below.

Impact on Petroleum Products

In a recent report, Oil Companies Advisory Council (OCAC) asked the ministry to intervene and ensure the timely issuance of LCs for the import of petroleum products. If the LCs are not opened on a timely basis, the country may face a shortage of petroleum products (petrol, diesel, etc.). 

On the other hand, there are high chances that the prices of petroleum products may increase when the LCs issue is resolved. It is because when the import restrictions will be lifted, there will be a huge jump in imports (that require dollars) as a result, dollar rate will also jump. This increase in Dollar rate will impact the fuel prices.

Latest: Even before the resolution of LCs, dollar rate has jumped to all time high due to which, the petroleum prices have already increased in Pakistan. Find new prices of petrol and other fuels by clicking on the link below.

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Latest: SBP Withdrew the Requirement of Prior Approval of Imports

As per the latest reports, State Bank has withdrawn the condition of prior approval for imports (falling under HS code Chapters, 84, 85 and certain items under HS code Chapter 87). The State Bank of Pakistan has directed the banks to prioritize the imports of certain essential items (food, pharmaceutical, energy, etc.). 

SBP has advised the banks to provide one-time facilitation to the importers. The central bank has also advised releasing the documents of shipments/goods which have already arrived at the ports (in Pakistan) or have been shipped on or before 18 January.

Conclusion

We have seen that the non-opening of LCs for import to save Dollars is impacting many industries. This issue may also impact some of the above-mentioned industries soon if left unnoticed. The good news is that SBP has withdrawn the Requirement of Prior Approval of Imports and allowed one-time facilitation. 

The government must consider that if this issue goes unnoticed, food, health, energy, and many other crises are on the way. Also, there are fears of job losses associated with the impacted industries. 

Political instability is also impacting the economic situation in the country. We can only hope that the government will stabilize the political and economic situation soon because we don’t have any other choice. 

What are your thoughts on the LCs issue in Pakistan? Tell us in the comment section below.