Circulars/Notifications - Exchange Policy Department  
 F.E. Circular No. 71
August 25, 1992 

All Authorised Dealers
in Foreign Exchange,

Dear Sirs,


ttention of Authorized Dealers is invited to para 57 Chapter XIII of the Exchange Control Manual, (6th Edition – 1987) in terms of which State Bank considers on case to case basis applications from residents of Pakistan to finance import of goods for residents in foreign countries provided arrangements are made to receive appropriate reimbursements from the country of import in each case either through back-to back letter of credit or advance payment.

2. It has now been decided with the approval of the Government to give general permission to three way merchanting trade through back-to-back letters of credit providing for payment in convertible currency or advance payments excluding payments under bilateral/multilateral accounts, in respect of the following 8 commodities:-

  1. Crude Oil

  2. Edible Oil

  3. Wheat

  4. Rubber

  5. Cotton

  6. Tea

  7. Sugar

  8. Fertilizer

Authorized Dealers are, therefore, permitted to open Letters of Credit in favour of third country exporters either against an irrevocable letter of Credit on sight basis or against advance remittance in convertible currency received from the ultimate importer provided:-

  1. The price differential includes intermediary’s commission at not less than one percent, plus actual chargers incurred on account of opening of back-to-back Letter of Credit, buying and selling rates differential etc.

  2. The Letters of Credit to be established by Pakistani intermediary in favour of third country supplier will carry sufficient usance so that payment become due only after receipt of payment from the importer. In case where Letters of Credit are to be opened against Advance remittance the condition of usance will not be obligatory.

  3. The amount of foreign exchange representing the price differential including commission will be converted in Pak. Rupees.

  4. No commission or any other claim of whatsoever nature will be allowed to be remitted from Pakistan.

  5. No credit line such as export finance etc. will be available.

  6. Goods will be shipped directly from the country of supply to the country of import.

  7. No forward cover facility will be available for trade under this arrangement. However, if desired, the intermediary Pakistani trader can open a "Special Foreign Currency Account" with an Authorized Dealer in Pakistan for deposit of the proceeds of the Letters of Credit/Advance remittances received from the third country buyer pending (i) eventual payments to the third country suppliers under the back-to-back Letter of Credit stipulating reimbursement to the third country suppliers out of Special Foreign Currency Account and (ii) conversion in Pakistan rupees of the amount left out after making payment to the third country supplier against back-to-back Letters of Credit. Interest accruing on balances held in the Special Foreign Currency Account will be required to be converted into Pakistan rupees.

3. General permission is hereby accorded to the Authorized Dealers for opening and maintaining Special Foreign Currency Accounts for merchanting trade which will be subject to the following terms, conditions and the procedure:-

  1. The account will be fed exclusively through remittances emanating either from the realization of proceeds under an irrevocable Letter of Credit opened by an overseas buyer for third country goods or advance remittance made by such buyer for supply of third country goods.

  2. The account will be kept outside the scope of Foreign Currency Accounts Scheme as embodied in Chapter VI of the Exchange Control Manual (6th Edition – 1987) as amended from time to time. In other words the foreign currency received in such accounts will not be required to be surrendered to the State Bank. Authorized Dealers can hold such foreign currency abroad in addition to the normal balances permitted to be held abroad. However, such balances will be reflected in Columns 10 and 11 of the Statement prescribed in Appendix V-6 of the Exchange Control Manual.

  3. Interest accruing on the balances held in the account will be converted into and paid in Pak rupees.

  4. The exemption of interest income from levy of taxes etc. shall not be admissible.

  5. The accounts opened under this arrangement will be only "proforma accounts" and balances held in such Accounts will neither be entitled to credit ceiling nor will they be reflected in Pakistan books of Authorized Dealers.

4. After payment for import under the back-to-back Letter of Credit, the Authorized Dealer will prepare a statement in the enclosed format market ''A' matching the receipt and payment for each merchanting transaction individually and will submit the same to the concerned area Exchange Control Office of the State Bank. The reporting of inward and outward remittances would be as indicated in the Annexure market 'B'. It may be added that withholding tax regime will not apply on such receipts.

5. For merchanting trade of commodities other than those specified above, the State Bank will continue to consider applications under the existing instructions on case to case basis at sufficient margin as heretofore.

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