In cash-strapped Pak, oil industry about to collapse

Islamabad, Feb. 4: Oil companies in cash-strapped Pakistan have warned that the industry is on the “brink of collapse” as the dollar liquidity crisis persists and cost of doing business balloons due to the rupee’s devaluation.

The government removed the dollar cap to meet the International Monetary Fund’s (IMF) demand which resulted in the Pakistani rupee falling to a historic low of Rs 276.58 in the interbank market, said a Geo News report.

The IMF has set several conditions for resuming the bailout, including a market-determined exchange rate for the local currency and an easing of fuel subsidies, both conditions the government has already implemented.

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 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”, it said.

The government has also restricted LCs due to dwindling foreign exchange reserves, which fell to $3,086.2 million as of January 27, just enough to cover only 18 days’ worth of imports, it said.

Pakistan is facing a balance of payments crisis and the plummeting value of the local currency is pushing up the price of imported goods.

Energy comprises a large chunk of Pakistan’s import bill. The country 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. According to the OCAC, these losses 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”.

“Although compensation for foreign exchange losses is allowed for LCs up to 60 days using PSO as a benchmark as per ECC approval of April 1, 2020, our other Member Companies are unable to recover their entire losses due to import profile differences with PSO,” Geo News quoted the OCAC as saying.