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Oil Industry on ‘Brink of Collapse’

In letter to government, Oil Companies Advisory Council seeks reimbursement of losses incurred due to currency devaluation

by Staff Report

File photo. Amer Hilabi—AFP

The Oil Companies Advisory Council (OCAC) this week wrote to the Oil and Gas Regulatory Authority (OGRA) and the energy ministry, warning both that Pakistan’s oil sector is on the brink of collapse due to the losses incurred by the recent devaluation of the rupee.

In a letter, the OCAC said the past two weeks’ rapid devaluation of the rupee against the dollar had caused losses of billions of rupees as letters of credit (LCs) for already sold product were now expected to be settled on the basis of new rates. These losses, claimed the letter, would impact the profitability and viability of the oil sector, adding that in some cases the losses might even exceed this year’s profit.

The letter noted that the Economic Coordination Committee in April 2020 had approved the compensation of foreign exchange losses for LCs up to 60 days using Pakistan State Oil (PSO) as a benchmark. However, it said, other member companies were unable to recover their entire losses due to import profile differences with PSO. Appealing to OGRA to revise this mechanism, OCAC said it shuld be ensured that exchange losses of the sector were fully reimbursed. It also suggested passing on the impact of exchange rates in one go instead of staggering it.

According to the OCAC, the trade finance limits from the banking sector have also become inadequate due to an increase in oil prices and depreciation of the rupee over the last 18 months. It said LC limits had shrank by 15-20 percent ‘overnight’ due to the recent devaluation. “In order to ensure the import of adequate products into the country, it is important to increase the trade finance and LC limits in line with current oil prices, exchange rate and volumes being handled by each company,” the OCAC said.

The Pakistani rupee’s value has declined to a historic low over the past two weeks, being traded at 270 against the U.S. dollar compared to 230 earlier. The reason for this is the government’s decision to return to a market-determined exchange rate in line with demands of the International Monetary Fund to revive a stalled bailout.

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