The Prime Minister’s Office has approached the Petroleum Division to draw its attention towards the unrecovered exchange rate loss of Rs26 billion being faced by the oil industry.
It has also pointed to the reduced sales tax, which prevents the recovery of paid sales tax, resulting in Rs65 billion being held back, which impacted the cash flow.
The oil industry is seeking intervention of the government to address several issues including the exchange rate loss that has mounted to Rs26 billion.
The Prime Minister’s Office, in a memorandum, said that the chairman of the Oil Marketing Association of Pakistan had highlighted the challenges faced by the emerging oil marketing companies (OMCs), particularly regarding fund management due to structural problems in the sector.
It said that the oil industry claimed unrecovered exchange losses that had accumulated to Rs26 billion due to flaws in the foreign exchange gain/loss recovery mechanism.
It also drew attention towards the impact of sales tax reduction. OMCs say that due to the reduction in sales tax on petroleum products, they are unable to recover the paid sales tax, resulting in stuck funds of Rs65 billion and affecting their cash flow. These funds are being held up in the inland freight equalisation margin (IFEM).
In this regard, “it is requested that views/comments on the subject matter may be provided to this secretariat, preferably by June 12, 2024,” the PM Office said.
Earlier, in a letter sent to the top military leadership, the Oil Marketing Association of Pakistan chairman appreciated the initiative to set up the Special Investment Facilitation Council (SIFC) to attract foreign investment and enhance foreign investors’ confidence in Pakistan’s economic potential.
“It is also imperative to consider the environment for our local investors who have already invested substantial resources and demonstrated a readiness to further their investments,” the oil industry said, adding that their business and other emerging OMCs were facing structural problems, particularly regarding fund management.
Vast sums of money necessary to facilitate foreign investment agreements had been inexplicably withheld by the government authorities, it said.
Although the Ministry of Energy (Petroleum Division) and the Oil and Gas Regulatory Authority (Ogra) acknowledge the existing flaws in the mechanism and recognise that companies have suffered losses as a result, they are reluctant to address them and expedite the reimbursement process.
These unrecovered amounts constitute a substantial portion of the companies’ working capital, thereby significantly impacting their operational efficiency.
The reduction of sales tax on petroleum products (petrol and high-speed diesel) to zero has prevented them from recovering the paid sales tax.
At present, the industry is facing a significant impact with Rs65 billion worth of funds being held back, severely impacting their cash flow. Government authorities acknowledge that funds have been stuck but refunds are being delayed due to the excessive bureaucratic processes.
It said in a letter that OMCs were experiencing a disruption in their cash flow as funds were being held up in the IFEM. The value of the funds received has decreased substantially due to delay in the IFEM audit, which has stretched over a period of eight years.
Given that the oil marketing sector heavily depends on imports and transactions are conducted in US dollars, this delay has had adverse consequences.
The oil industry said that the challenges were affecting the entire industry and resulting in excessively high mark-up costs on the stuck funds. Although government authorities were aware of the issues, they were reluctant to resolve the underlying problems, “which is now putting the industry at risk of survival”.
“It is crucial to acknowledge that these challenges not only harm the financial well-being of the industry but also act as a significant obstacle to attracting both foreign and local investments in Pakistan’s energy sector,” the industry said.
“Addressing these issues is vital for establishing an environment that fosters sustainable business growth and instills confidence in investors.”
Published in The Express Tribune, June 8th, 2024.
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