Global banks stop trade credit for oil imports by Pakistani firms

KARACHI: Foreign banks have stopped offering trade credit for oil imports to Pakistani refineries, and some suppliers are seeking payment upfront to avoid potential problems resulting from political standoff in the country, industry sources said on Wednesday.

They said politically-tense Pakistan is likely to face fuel shortages in days to come as international banks have refused to confirm letter of credits (LCs) for oil import orders citing “high country risk” alert.

For the import of crude oil from the global market, LCs are opened by the local banks. However international banks confirm the LCs of local paretners to provide guarantee to the exporter. Under the guarantee if a Pakistani bank defaults on a payment to an exporter, its international counterpart pays the amount.

“The political unrest has increased the country’s risk in the eyes of international banks and they are reluctant to confirm LCs,” a source in the oil sector told The News.

The source said a quasi-stalemate in Pakistan’s talks with the International Monetary Fund (IMF) had also complicated the situation.

“The deadlock has created a serious credibility crisis for the country in the global market.”

Sources pointed out that following the Sri Lanka default, an overall negative environment emerged in Pakistan, being perceived as the next country heading towards a default after a serious balance of payment crisis and a huge erosion of foreign exchange reserves.

“This situation has not only severely dented Pakistan’s credit rating, but it also has added to the country’s risk especially for confirming the LCs.”

Sources said that refineries and oil marketing companies (OMCs) are in serious trouble.

“Refineries are in direr straits as their cargoes are larger than OMCs.”

Sources said three refineries in particular were in deeper trouble as due to non-confirmation of their LCs, their planned crude oil cargoes would not arrive in Pakistan, resulting in reduced refining operations.

They said Pakistan was already struggling hard to ensure a smooth supply of petroleum products in view of their rising global prices and government’s policy to keep the prices low through subsidies on petrol and diesel.

“Oil sector has taken up the issue with the government and Secretary Petroleum held a meeting with

the oil sector people to resolve this issue,” source disclosed.

The Secretary Petroleum has assured the appropriate action is being taken to resolve the issue, they added.

“The State Bank of Pakistan is expected to step in and come up with some viable and speedy solution to the problem,” the source said.