OCAC seeks to recover exchange rate losses

Industry proposes govt to offset losses through inland freight margin

ISLAMABAD:

The Oil Companies Advisory Council (OCAC) has requested the government to recover the oil sector’s exchange rate losses through the inland freight equalisation margin (IFEM), which will ensure survival of the industry.

OCAC, a body comprising oil marketing companies (OMCs) and refineries, has warned that the grave situation has emerged due to the exchange rate losses caused by sudden depreciation of the rupee against the US dollar.

The government has kept artificial control over oil prices by denying the industry recovery of currency exchange losses.

In a letter sent to the Petroleum Division secretary, the OCAC requested immediate establishment of a holistic mechanism for offsetting losses through the IFEM.

“On behalf of our member companies, we would like to highlight the severe impact of recent depreciation of Pakistani rupee and request an urgent meeting with the industry,” said the OCAC.

The industry has been pressing the Ministry of Energy as well as the Ministry of Finance to develop a mechanism for the recovery of all exchange rate losses.

“As of today, the ideal solution is to immediately revise prices based on the current exchange rate, however, we understand that this may be challenging for the government,” it said.

OCAC warned that steep depreciation of the rupee had made the existing Letter of Credit (LC) lines inadequate for the industry and as a result there was a grave danger that the import of crude and refined products may be disrupted.

“It is 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 pricing.”

It reminded the government that at the current rupee-dollar parity and after the recent increase in State Bank’s policy rate, simply maintaining 20-day petroleum stock cover, as per the licence requirement of OMCs, resulted in borrowing cost that was eating up more than 50% of the regulated margins.

In the extremely challenging environment, the OCAC pointed out, an additional working capital burden could raise significant concerns about whether OMCs would be able to sustain their operations.

Additionally, “we would like to highlight that the industry has been doubly hit due to the erosion of equity from FX 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 of high-speed diesel (HSD).”

The oil price and currency exchange rate changes imply that the industry needs 90% greater LC limits in local currency compared with last year to procure the same quantity of HSD.

Ensuring that the banking sector enhances the limits for industry members, enabling them to manage the impact of increased oil prices and rupee depreciation, is critical for survival of the sector and to maintain integrity of the petroleum supply chain, emphasised the OCAC.

It cautioned that the industry was on the brink of collapse as instances of fuel shortage in certain areas earlier this year had highlighted the fragile condition of the industry. It requested urgent action on the part of the government to ensure uninterrupted supply of petroleum products across the country.

 

Published in The Express Tribune, March 8^th, 2023.

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