Pakistan’s oil industry on brink of collapse

Pakistan is facing a balance of payments crisis and the plummeting value of the rupee is pushing up the price of imported goods…reports Asian Lite News

Pakistan’s oil companies have warned that the industry is on the “brink of collapse” as the dollar liquidity crisis persists and their cost of doing business balloons due to the Pakistani rupees (PKR) devaluation.

To meet the International Monetary Fund’s (IMF) demand, the government removed the dollar cap, resulting in the rupee falling to a historic low of 276.58 PKR in the interbank market, Geo News reported.

In a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry, the Oil Companies Advisory Council (OCAC) said that the “sudden depreciation” of the local rupee has caused losses worth billions of rupees to the industry as their letters of credit (LCs) are expected to be settled on the new rates, “whereas the related product has already been sold”.

The government has also restricted LCs due to dwindling foreign exchange reserves, which fell to $3,086.2 million as of January 27, and are enough for just 18.5 days, Geo News reported.

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.

These losses, the OCAC said, not only have an impact on the profitability of the sector, which is already under severe pressure, but also on its viability since these setbacks in some cases might exceed the “entire year’s profit for the sector”, Geo News reported.

“It is requested 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 told the authorities.

The letter mentioned that OGRA has adopted the practice of not fully passing on the impact of the rupee depreciation and instead putting an 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, the OCAC said it is crucial that OGRA passes the impact of the exchange rates in one go and not stagger this compensation, Geo News reported.

The council added that due to an increase in oil prices and successive depreciation of the Pakistani rupee over the last 18 months, the trade finance limits available from the banking sector to the industry have become inadequate.

As a result of the recent devaluation alone, the LC limits have overnight shrunk by 15-20 per cent, the OCAC said.

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