Pakistan has joined the apparently increasing number of South Asian countries tasked with coping with difficult economic conditions where letters of credit (L/Cs) are becoming harder to come by.

Earlier this year, Bangladesh followed Nepal's move to restrict the use of L/Cs for non-essential imports while banks in Sri Lanka have been unable to issue L/Cs since last year (DC World News, 20 May 2022).

Oil crisis

Pakistan's domestic banks cannot provide L/Cs at all for oil imports while foreign banks are demanding a 100 per cent cash margin according to the Dawn newspaper, which cites sources in the financial market.

It is also reporting that the ministry of finance and the State Bank of Pakistan are negotiating with oil exporting countries to accept L/Cs issued by local banks at a reduced cash margin of 10-20 per cent.

Ratings downgrade

Banks financing a range of imports meanwhile are reporting difficulties in opening fresh L/Cs since last week when Moody's Investors Service downgraded its outlook on Pakistan to negative from stable citing financial concerns and delays to an International Monetary Fund bailout.

Pakistan faces heightened external vulnerability and uncertainty around securing external financing to meet the country's needs while the country's 'weak institutions and governance strength' add uncertainty around the future direction of macroeconomic policy according to Moody's.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.