Pakistan’s Oil Industry is on the Brink Of Collapse as the Dollar Liquidity Crisis

(CTN News) – As the dollar liquidity crisis continues and their costs of doing business soar owing to the rupee depreciation, Pakistan’s oil corporations have warned that the sector is “on the verge of collapse.”

The government lifted the dollar limit in response to the International Monetary Fund’s (IMF) request, which caused the rupee to plunge to a record low of Rs276.58 in the interbank market.

The Oil Companies Advisory Council (OCAC) claimed in a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry that the “sudden depreciation” of the local rupee has resulted in losses to the industry amounting to billions of rupees because their letters of credit (LCs) are anticipated to be settled at the new rates, “whereas the related product has already been sold.”

Due to declining foreign currency reserves, which as of January 27 were just $3,086.2 million and sufficient for 18.5 days, the government has also imposed restrictions on LCs.

Due to the rupee’s sharp decline in value, Pakistan is now experiencing a balance of payments crisis, driving up the cost of imported commodities.

A significant portion of Pakistan’s import bill is made up of energy. Over a third of Pakistan’s yearly power needs are normally met by imports of natural gas, the cost of which skyrocketed when Russia invaded Ukraine.

The OCAC said that these losses affect the industry’s existence and its already severely strained profitability since, in certain situations, they may surpass the “entire year’s profit for the sector.”

“Our other Member Companies cannot recover their total costs owing to import profile disparities with PSO, even though compensation for foreign currency losses is authorized for LCs up to 60 days using PSO as a benchmark as per ECC decision of 1 April 2020,” the statement reads.

If the industry’s survival and supply to retail outlets are to be guaranteed, the OCAC asked the government to “urgently modify this method and ensure that exchange losses of the sector are completely repaid.”

According to the letter, OGRA has embraced the practice of not completely passing on the effects of the devaluation of the rupee and instead burdening the industry.

The OCAC said that it is imperative that OGRA passes the effect of the exchange rates in one go and not stagger this compensation due to the difficulties still experienced by the sector due to prior exchange rate changes and the significant impact of the present depreciation.

The council also noted that the trade financing restrictions offered by the banking sector to the industry had become inadequate due to rising oil costs and the consecutive devaluation of the Pakistani rupee over the previous 18 months.

According to the OCAC, the LC limits have decreased by 15-20% overnight due to the most recent devaluation alone.

“It is vital to increase the industry’s trade finance/LC limits following the current oil prices, currency rate, and the quantities being handled by each firm to enable the import of appropriate goods into the nation.”

The colleague said that the industry is in danger of collapsing if the aforementioned issues are not addressed right now.

Oil refinery Cnergyico told the Petroleum Division that it would suspend operations for more than a week hours after the letter was received.

This is to advise your office that, under the arrival of crude oil vessels, the Cnergyico refinery will cease operations as of February 2, 2023, and resume operations as of February 10, 2023.

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