Oil import LCs shrink up to 20pc on rupee devaluation

KARACHI: Pakistan’s oil sector on Monday sought urgent revision in the exchange loss adjustments mechanism on import of petroleum products as the letters of credit limits have shrunk by 15-20 percent overnight on account of rupee devaluation.

Oil Companies Advisory Council (OCAC), the representative body of refineries and oil marketing companies (OMCS), in a communication to the Petroleum Division stated that the sudden depreciation of rupee has caused a loss of billions of rupees to the industry, whose letters of credits are expected to be settled on the new rates whereas the related product has already been sold.

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

Oil body sought immediate steps to compensate the industry and added that although compensation for foreign exchange losses was allowed for LCs up to 60 days, using PSO as a benchmark as per ECC approval of April 1, 2020, the sector companies were unable to recover their entire losses due to import profile differences with PSO.

OCAC sought to urgently revise this mechanism and ensure that exchange losses of the sector were fully reimbursed if the viability of the industry and supplies to retail outlets were to be ensured.

It noted that OGRA has adopted the practice of not fully passing on the impact of rupee depreciation and instead putting 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, “it is crucial that OGRA passes the impact of the exchange rates in one go and not stagger this compensation”.

Due to increase in oil prices and successive depreciation of the rupee over the last 18 months, the trade finance limits available from the banking sector to the industry have become inadequate, it said, and added that as a result of the recent devaluation alone, the LC limits have overnight shrunk by 15-20 percent.

In order to ensure import of adequate product into the country, OCAC pointed out that it was important to increase the trade finance / LC limits of the industry in line with the current oil prices, exchange rate and the volumes being handled by each company.

OCAC sought the government’s intervention to ask the banking sector through the State Bank of Pakistan to enhance the limits of its member companies as the industry was on the brink of collapse if immediate steps were not taken in respect of the above.

Highlighting the severe impact of the recent depreciation of the rupee, OCAC proposed an urgent meeting of the government with the industry to discuss the issue.