Pakistan’s Oil Sector’s Credit Crisis Could Affect Supplies

Pakistan’s banking sector is facing liquidity issues for the opening of international letters of credit (LCs) for Oil Marketing Companies (OMCs) and Oil Refineries for the import of refined and crude oil.

This was revealed in background meetings between the OMCs, refineries, and Petroleum Division officials. Sources privy to the situation told ProPakistani that Pakistan is facing double jeopardy because the LCs issued by its banks are being returned by international lenders, as the credit lines have chocked.

The Oil Companies Advisory Committee (OCAC) has written a letter to the Ministry of Energy and Petroleum Division to look into the matter, and the Secretary Petroleum Division held an online meeting with all the stakeholders, including the OMCs, refineries, and representatives of the State Bank of Pakistan (SBP), the source revealed.

The Secretary has asked the SBP to look into the matter and resolve the issue pertaining to the LCs and the credit line. The OMCs have requested the banks to increase the credit lines as the international fuel prices are increasing and the credit lines have been continuously exhausted because of increased bills of payments.

Pakistan’s country risk has increased as the political impasse continues besides the uncertain economic situation along with the stalled IMF program. The recently-concluded IMF talks are awaiting action by the government as the subsidies on petroleum products and electricity prices are still continuing, which is a big impediment to the resumption of the IMF’s Extended Fund Facility (EFF).

Local banks open LCs for the import of crude oil from the global market but international banks confirm the LCs of local partners to provide a guarantee to the exporter. Under the guarantee, if a Pakistani bank defaults on a payment to an exporter, its international counterpart has to pay the amount.

“The political unrest has increased the country’s risk in the eyes of international banks and they are reluctant to confirm LCs,” sources said.

Foreign banks have stopped offering trade credit for oil imports to Pakistani refineries and some suppliers are seeking upfront payments to avoid the potential problems that can result from the political standoff in the country, sources confirmed.

The Oil Companies Advisory Council (OCAC) has repeatedly reminded the government that the Price Differential Claims (PDC) are being streamlined but the OMCs and refineries are finding it difficult to smooth the supplies from the international suppliers as the huge differences in the price of purchase and the price of selling because the government’s subsidy is making it difficult for the oil sector.

Offline discussions suggest that the supplies might be hindered in the coming days as large refinery cargoes are being delayed and a couple of large refineries are facing cargo delays because the credit lines have been exhausted and it may receive May’s cargoes in June. Similarly, Attock Refinery Limited (ARL) might stop furnace oil supplies as its credit has been exhausted and the PDC payment to all the parties has not been streamed.

The government is expected to intervene through the Ministry of Finance and the State Bank of Pakistan to resolve this issue within this week.

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Faiz Paracha is a seasoned broadcast journalist with over 15 years’ experience in reporting and e...

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