Pakistan’s oil imports have been hit by the continuing crisis of a lack of trust by international sellers in letters of credit (LC) issued by Pakistani banks, and pricier bids received in last week’s tender auction by Pakistan State Oil (PSO) are likely to result in higher oil prices in Pakistan, informed sources told Profit.
The only bidders accepted by PSO in its tender auction on Tuesday were 1Energin and Idemitsu, which are small and more expensive suppliers.
“Bigger international players are either choosing to wait out until the economic situation in the country improves, or putting up bids at higher premiums to stay in the market,” adds the source. Bids at higher premiums, however, may also be a reflection of the cost of guarantors or the higher rate at which a discount on LCs is provided.
“The cost of cargoes is going to rise as the supplier’s bank (foreign bank) will bear the brunt of the guarantor’s cost. This will be passed onto consumers,” a source in the oil trading business told Profit.
Amid reports of a shortage of US dollars in the interbank market, international banks are not accepting LCs from Pakistani banks without a 100 percent cash margin, and sometimes not even then. International banks as the receiving party in the LCs, are asking for a third-party bank for a confirmation; a guarantee that the Pakistani bank will pay the LC amount when it falls due.
The foreign bank pays for the additional cost of adding on a guarantor. This is usually at a 1-1.5% rate. This has happened in the past on several occasions.
A source at a big commercial bank on the condition of anonymity, however, pointed out the irony in all of this. Referring to Hascol’s case, which is owned by Vitol, he says, “It is ironic how oil suppliers like Vitol and its banks do not trust our banks to honor their LCs, while Vitol itself is (indirectly) the biggest defaulter of the Pakistani banking industry.”
As per another senior source in the banking industry, foreign banks are cautious dealing with Pakistani counterparts right now keeping in mind the position of the country’s foreign exchange reserves.
Suppliers usually provide oil marketing companies (OMCs) with usance LCs for a period of 30-45 days. International suppliers are facing issues with their banks on discounting it.
LC discounting is a credit facility extended by banks. In this process, the financial institution purchases bills or documents from exporters and after discounting the bill amount, i.e. reducing the applicable charges, gives the exporter the amount owed by the importing bank. As per sources, exporters’ banks are charging a higher discount rate when discounting LCs issued by Pakistani banks. As a result, the cost of tenders is rising for OMCs.
Experts in the oil trading industry have stated that Pakistan still has the option of accepting more expensive cargoes to avoid a shortage in the country.
PSO has not responded to questions sent in by Profit until the filing of this report.