ISLAMABAD: On behalf of the oil industry, the Oil Companies Advisory Council (OCAC) has written a letter to the Ministry of Energy expressing their concerns about the “severe impact of the Pakistani Rupee depreciation”.
In the letter addressed to the Secretary Petroleum Division, OCAC – umbrella organisation of refineries and oil marketing companies (OMCs) – has highlighted the severe impact of depreciation in the Pakistani rupee on the oil industry and requested an urgent meeting.
“As of today, the deal is to immediately revise the prices based on the current exchange rate, however, we understand that this might be challenging for the government,” the letter read.
Followed by requests to the government to ask the banks to increase credit limits for the sector and implement a holistic mechanism for recovery of exchange losses to manage the impact of increased oil prices following the steep depreciation in the local currency.
As per the Council’s letter, the steep depreciation of Pakistani rupee has made the existing LC lines inadequate for the industry, resultantly there is a grave danger that import of crude and refined products may be disrupted.
It is also a point of great concern for the industry that the cost of opening confirmed LCs has gone up many times, adversely impacting profitability as this cost is not absorbed in the pricing.
Further, current PKR/USD parity and after the increase in SBP Policy rates, simply maintaining 20 days’ stock cover as per OMC licence requirements results in borrowing costs of more than 50% of regulated margins.
The Council in its letter also highlighted that the industry has been doubly hit due to the erosion of equity from foreign exchange losses as well as reduction in working capital lines due to increase in the PKR/USD parity coupled with increase in international oil prices, particularly diesel.
While giving the comparison of global oil prices and exchange rate in the last 14 months the OCAC said that oil price and exchange rate changes imply that it needs 90% greater LC limit in local currency terms compared with the last year to procure the same quantity of diesel.
The Council urged the government to ensure that the banking sector enhances limits for the industry members enabling them to manage the impact of increased oil prices and rupee depreciation as it is critical for the survival of the sector and to maintain the integrity of the supply chain.
Requesting an urgent action to ensure uninterrupted supplies, the Council stated that the oil industry is on the brink of collapse, instances of fuel shortage in certain areas earlier this year highlight the fragile conditions of the industry, your urgent action is requested to ensure uninterrupted supplies.
In the same letter it suggested that the recovery of exchange loss can be managed through the adjustment of Inland Freight Equalisation Margin (IFEM).
According to the OCAC’s letter, the Council has been following up with the Ministry of Energy as well as the Ministry of Finance for developing a mechanism for complete recovery of exchange losses.
