Foreign banks have started charging a whopping 10 percent commission before opening letters of credit for our imports/ This step has a number of implications, all of them negative for the country. First, it means that the country’s import bill will go up, for the commission will be charged in the same currency as the LC, which is usually the US dollar. The 10 percent will be passed on to the importer, who in turn will charge the consumer. All imported goods, which include fuel (both for transport and generation), palm oil and medicines, are about to get a 10 percent increase without exception. Actually, the hike will be more than 10 percent, because the rupee is also depreciating, and having crossed 300 to the dollar, is going down no one knows how much more.
Apart from such tangible economic consequences, the charge reflects a total lack of confidence of the international banking system in the country’s economy. This is reflected in no small measure by the foreign banks’ describing this as a cover for risk. This also shows that the foreign banks’ do not trust the caretaker government to make the right decisions. It is also a vote of no-confidence in the credit rating agencies, who have not changed Pakistan’s ratings recently, their last revision. Indeed, the last change by Fitch’s was when Pakistan was bumped up from CCC- to CCC in July, after it was granted an IMF SBA. Indeed, it seems that being on an IMF programme cuts no ice any longer with foreign banks anxious to secure their LCs.
It should be noted that this move is quite unprecedented and reflects the worry by foreign banks that Pakistan might not be able to manage its debt, despite the SBA and help from foreign friendly countries. On top of it all, the increase in uncertainty caused by the caretakers’ intention to hang on by postponing elections, does not seem to have helped. The result is that the country may avoid default, but it will soon face a default-like situation, where it finds itself unable to import essentials. True, the news of Pakistan being unable to service its debt may not convulse the world’s financial system, but the people of Pakistan will be convulsed when they sit at home in the dark with nothing to eat, and no medicines for their ill.
