Pakistan’s oil imports facing foreign exchange constraints

PTI, May 31, 2022, 5:04 PM IST

Cash-strapped Pakistan may face a supply disruption in its oil sector as the key industry is facing challenges in arranging international finances for import of crude and oil products, according to a media report on Tuesday.

The Petroleum Division has informed Prime Minister Shehbaz Sharif and Finance Minister Miftah Ismail that arrangements of oil imports are getting tough by the day as foreign banks are not providing financing against letters of credit (LCs) opened by oil marketing companies (OMCs) and refineries with the local banks, the Dawn News reported, citing its sources.

A senior official told the Pakistani daily that except two large corporations – Pakistan State Oil (PSO) and Pak-Arab Refinery Limited (Parco) – all OMCs and refineries are struggling to arrange imports of petroleum products and crude.

About six-seven cargoes worth USD 50-75 million each (USD 350-500m cumulative) depending on size and product were held up at present because of the increased risk following some critical statements from the relevant ministries about the tough fiscal and foreign exchange position, the daily reported.

The sources said that Pakistani banks were opening LCs on behalf of the oil industry, but their partner banks were not extending credit cover.

“Unfortunately, the country’s fuel supply is now also being severely threatened by limited credit facilities, high inflation and increasing rupee-dollar parity,” stated an oil industry’s report sent by the Petroleum Division to the Prime Minister Office and the finance minister.

The oil industry has told the government that this financial predicament had left the oil industry extremely vulnerable and fragile, adding that this “may result in breakdown of the supply chain”.

The Oil Companies Advisory Council reported to the ministries of petroleum and finance that “immediate remedial measures are required to be taken across two targeted areas of concerns — reluctance of international banks to confirm LCs for oil imports and timely remittance of price differential claims”.

This situation was impacting both the refiners and OMCs and hence the downstream oil sector is seeking intervention at the highest level to avert the impending supply disruption facing the country.

The sources said the finance ministry and State Bank of Pakistan would have to use their good office with international partner banks with special allocation of USD 500m-1bn in foreign exchange. The government may also have to seek a one-time exemption for borrowing from the central bank, the sources said.

This is despite the fact that the prices of all products have been increased by Rs 30 per litre with effect from May 27, but the amount of PDC (price differential claim) has not drastically come down.

The sources said the Petroleum Division had moved a note for the approval of a supplementary grant of Rs 72 billion for second half of May but was reduced to Rs 62 billion because of Rs 30 per litre price hike. The grant was approved by the Economic Coordination Committee (ECC) of the Cabinet last Saturday.

However, another Rs 50 billion worth of PDC estimate has been finalised by the Oil and Gas Regulatory Authority (Ogra) for the first half of June. The sources said Ogra had originally estimated Rs 81 billion allocation for PDC for June 1-15, but this has been reduced to Rs 49 billion after taking into account the Rs 30 increase.

These estimates, however, suggest that unless the government announces another price hike in a few days, it will have to continue providing Rs 39.20 per litre subsidy on petrol, Rs 54.40 on high speed diesel, Rs 22 on kerosene and Rs 38 on light diesel oil.

An amount of Rs 228 billion has already been accumulated as subsidy on petroleum products from March 1 to May 31 this year. Of this, about Rs 100 billion has been transferred to the Pakistan State Oil’s special assignment account for payments to oil companies and refineries, while Rs 128 billion is yet to be approved or passed on to the PSO, the daily reported.