Pakistan braces for fuel shortages amid liquidity crisis

KARACHI: Pakistan can face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves, foreign media said quoting traders and industry sources.

Pakistan is facing a balance of payments crisis and the plummeting value of the rupee is pushing up the price of imported goods. Energy comprises a large chunk of Pakistan’s import bill. Pakistan typically meets more than a third of its annual power demand, using imported natural gas, prices for which shot up following Russia’s invasion of Ukraine. “There is no shortage this fortnight. If we don’t have LCs (letters of credit) open right now, we might see shortages in the next fortnight,” a senior official at one of the oil companies said.

A letter of credit issued by the importer’s banks is a standard form of payment guarantee in the oil trade to the exporter. Oil traders, however, are shunning countries such as Pakistan and Sri Lanka due to an acute shortfall of foreign exchange. The state-owned refiner Pakistan State Oil (PSO) and Pakistan LNG Ltd have left a flurry of fuel tenders unawarded in the last couple of months.

The sudden steep depreciation of the rupee against the dollar has caused a colossal loss of billions of rupees to the country’s oil industry, putting it on the brink of collapse. And more importantly, in the wake of recent devaluation alone, LC limits have overnight shrunk by 15-20%.

The Oil Companies Advisory Council (OCAC) divulged the fact in its letter written on January 30, 2023, to the secretary petroleum and the chairman OGRA, saying that the sudden rupee depreciation caused a loss of billions of rupees to the industry, whose letters of credit were expected to be settled at new rates whereas the related product had already been sold. “These losses not only have an impact on the profitability of the sector, which is already under severe pressure, but also on the viability of the sector since these losses in some cases might exceed the entire year’s profit for the sector.”

The OCAC asked for immediate steps to compensate the industry, arguing that although compensation for foreign exchange losses was allowed for LCs up to 60 days using PSO as a benchmark as per the ECC approval of April 1, 2020, other OMCs and refineries are unable to recover their entire losses due to import profile differences with the PSO.

It asked the government to urgently revise this mechanism and ensure that exchange losses of the sector are fully reimbursed if the viability of the industry and supplies to retail outlets are to be ensured.

The OCAC came down hard on the OGRA, saying that the regulator adopted the practice of not fully passing on the impact of rupee depreciation and instead put immense burden on the sector.

“Due to the challenges still being faced by the sector of previous exchange rate adjustments and the enormous impact of the current depreciation, it is crucial that the OGRA pass the impact of the exchange rates in one go and not stagger this compensation.”

The letter highlighted that due to the increase in oil prices and successive depreciation of the rupee over the last 18 months, the trade finance limits available from the banking sector to the industry had become inadequate.

As a result of the recent devaluation alone, LC limits have overnight shrunk by 15-20%. To ensure the import of adequate products into the country, it is important to increase the trade finance/LC limits

of the industry in line with the current oil prices, exchange rate and the volumes being handled by each company.

It is requested that the banking sector be immediately requested through the State Bank of Pakistan to enhance the limits of our member companies. “The industry is on the brink of collapse if immediate steps are not taken,” the letter said.