Advance Deposit Requirements for Imports in Pakistan

The system of advance deposit requirements for imports, as a means of improving the balance of payments, has achieved some popularity in recent years. Most frequently used in Latin America, this technique, in the form of margin requirements at the time of opening a letter of credit, has also been employed in Pakistan from time to time. Advance deposit requirements serve as a selective credit control instrument to raise the cost of financing imports and thus directly affect the ability and willingness to import. Under certain conditions, the requirement can also be an effective general instrument of monetary policy through its indirect effects on the supply and demand for liquid assets in the private sector. These direct and indirect effects may then reduce the demand for imports and thus improve the balance of payments of the country concerned. Imports in Pakistan were liberalized in August 1948, because at that time the limited productive activity in the country made large quantities of imports a physical necessity. In September 1949, the devaluation of sterling, followed by Pakistan’s decision not to devalue its own currency, rendered importing very profitable. During 1950 the demand for imports increased as a result of rising incomes due to the Korean boom. To limit this demand, orders were issued in September 1950 by the State Bank of Pakistan requiring advance deposits on imports.