“On the Verge of Collapse”: SOS of Pakistan Oil Industry Ahead of IMF Meeting

Islamabad:

Oil companies in cash-strapped Pakistan have warned that the industry is on the “brink of collapse” as the dollar’s liquidity crunch persists and rupee depreciation increases their cost of doing business.

According to a Geo News report, the government removed the dollar cap to meet the demand of the International Monetary Fund (IMF), as a result of which the Pakistani rupee fell to a historic low of Rs 276.58 in the interbank market.

The IMF set several conditions for resuming the bailout, including a market-determined exchange rate for the local currency and easing of fuel subsidies, both conditions that the government has already implemented.

In a letter to the Oil and Gas Regulatory Authority (OGRA) and the Ministry of Power, the Oil Companies Advisory Council (OCAC) said the “sudden depreciation” of the rupee has resulted in billions of rupees lost to the industry as their letters of credit (LCs) The new rates are expected to be decided “whereas the product concerned has already been sold”, it said.

Reports said the government has also restricted LCs due to dwindling foreign exchange reserves, which fell to USD 3,086.2 million as of January 27, which is only enough to cover 18 days’ imports.

Pakistan is facing a balance of payments crisis and the falling value of the local currency is pushing up the prices of imported goods.

Energy comprises a major portion of Pakistan’s import bill. The country typically meets more than a third of its annual electricity demand using imported natural gas, whose prices rose after Russia’s invasion of Ukraine.

According to OCAC, these losses not only have an impact on the sector’s profitability – which is already under severe pressure – but also on its viability as in some cases these shocks can exceed “the full year’s profit for the sector”. Are. ,

“Though compensation for foreign exchange losses is allowed for LCs up to 60 days using PSO as the benchmark as per ECC approval dated April 1, 2020, our other member companies have been able to compensate their entire portfolio due to import profile differences with PSO. unable to recover the losses,” Geo News quoted the OCAC as saying.

“This mechanism is requested to be revised immediately and to ensure that the sector’s exchange deficit is fully reimbursed to ensure the viability of the industry and supply to retail outlets,” the OCAC told officials.

The letter mentions that OGRA has adopted the practice of not fully passing on the impact of rupee depreciation and instead putting a heavy burden on the sector.

With challenges still being faced in the area of ​​past exchange rate adjustments and the heavy impact of the current depreciation, OCAC said it was important that OGRA pass through the effects of exchange rates in one go and compensate for this. Do not stop, said the report.

The Council noted that due to increase in oil prices and continuous depreciation of Pakistani Rupee in the last 18 months, trade finance limits available to industry from the banking sector have become insufficient.

OCAC said that as a result of the recent devaluation alone, the LC limit has been reduced by 15-20 per cent overnight.

“In order to ensure import of sufficient products into the country, it is important to raise the trade finance/LC limits of the industry in line with current oil prices, exchange rates and volumes being handled by each company.” ,

OCAC said, “If immediate steps are not taken with respect to the above, the industry is on the verge of collapse.”

Hours after the letter was sent, Cnergyico, an oil refinery, informed the petroleum division that it would cease operations for more than a week.

“This is to inform your office that the Cnergyico refinery will be shut down from February 2, 2023 and will resume production from February 10, 2023,” the statement said.

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