Tuesday March 21, 2023

Only one Saudi bank opening LCs for Pakistan’s crude import

By Our Correspondent
March 15, 2023

KARACHI: Al-Rajhi Bank of Saudi Arabia is the only foreign bank presently confirming letters of credit (LCs) for Pakistani crude oil import after the refusal from other global banks, The News learnt on Tuesday.

For several months, foreign banks have been refusing to confirm the letters of credit for the import of crude oil on account of the burgeoning dollar crisis faced by Pakistan. Except Al-Rajhi Bank, other banks refrained from taking on the liability.

The issue of non-confirmation of letters of credit by the foreign banks first surfaced in May last year, when some banks refused to confirm the LCs for oil imports. With the escalation of the dollar crisis, now the country is left with only one bank that has been taking on the liability of confirming letters of credit for crude import.

According to well-informed sources in the oil sector, the reliance on only one bank for the confirmation of credit letters has been causing severe hardships for the country’s crude oil import. The issue was also raised before the State Bank of Pakistan (SBP) governor when the oil sector delegation apprised him about the issues confronting the sector.

The governor assured the delegation that foreign banks would be contacted to facilitate the crude oil imports of Pakistan. The SBP chief was informed that crude oil import is imperative to ensure the country’s energy security and in case of hurdles, the country would have to go for importing petroleum products. However, importing petroleum products would be costlier for the country in terms if draining out more dollars.

Assuring the oil sector, the central bank governor said he would talk to the domestic banks to enhance the credit limits of the oil sector. However, he noted that banks “cannot go beyond a certain limit in extending credits”.

Credit limits of the sector have shrunk sharply in the last one year as dollar rate soared to Rs280 compared to Rs178 a year ago, the oil sector told the governor. Now the capital requirements for the oil sector cannot be met on the basis of existing credit limits, it was pointed out.

The SBP governor was informed about the cash flow problems in the oil sector due to non-recovery of exchange rate adjustment following petroleum price reviews done on a quarterly basis.

Regarding the opening of letters of credit, the oil sector stakeholders asked the central bank chief to allow the opening of LC and its settlement from different banks as there was no restriction on opening of LC from one bank and its settlement from another bank in the past. Since the beginning of the dollar crisis, the LC can only be settled by a bank, which opens it, which according to the oil industry was creating hurdles in the settlement of oil import LCs.

However, the SBP governor did not subscribe to the proposal of the oil industry and said that reversing the mechanism would create more volatility in the exchange rate.