Rupee depreciation hit OMCs hard
As the fuel industry faces losses worth billions of rupees in the wake of sudden depreciation of the rupee against the US dollar, the Oil Companies Advisory Council (OCAC) has called for reimbursing the loss to the oil marketing companies (OMCs).
The Oil Companies Advisory Council (OCAC), in a letter sent to Petroleum Division secretary and Oil and Gas Regulatory Authority (Ogra) chairman, said on behalf of its member companies, it would like to highlight the severe impact of the recent depreciation of the local currency and request an urgent meeting with the industry to discuss the matter to reach a consensus on a way forward.
The Pakistan State Oil (PSO), being a key oil importer, is said to face a massive exchange loss of around Rs20 per litre on petrol because of the sudden depreciation of the rupee.
The PSO has already touched the red line as its receivables have crossed Rs700 billion. It has already defaulted on its payments from several of its clients in the country.
“As you are aware, the sudden depreciation of the rupee has caused a loss of billions to the [fuel] industry, whose letters of credit [LCs] are expected to be settled on the new rates whereas the related product has already been sold,” the OCAC wrote in the letter.
It further said that these losses not only had an impact on the profitability of the sector, which is already under severe pressure, but also on its viability.
The OCAC wrote that the reason for this was that these losses in some cases might exceed the entire year’s profit for the sector.
“It is requested that immediate steps to compensate the industry should be devised. Although the compensation for foreign exchange losses is allowed for LCs up to 60 days using the [Pakistan State Oil] as a benchmark as per ECC's [Economic Coordination Committee] approval of April 1, 2020, our other member companies are unable to recover their entire losses due to [the] import profile differences with the PSO,” it added.
The OCAC also requested 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 complained that Ogra had adopted the practice of not fully passing on the impact of the rupee depreciation and instead putting immense burden on the sector.
“Due to the challenges still being faced by the sector of [the] 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,” the letter read.
The OCAC maintained that because of the 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 had become inadequate.
“As a result of the recent devaluation alone, the LC limits have overnight shrunk by 15-20%,” it added.
The OCAC wrote that to ensure import of adequate product into the country, 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.
The council requested that the banking sector be immediately requested through the State Bank of Pakistan to enhance the limits of its member companies.
The OCAC claimed that the oil industry was on the brink of a collapse and called for immediate steps to be taken.