Three-month credit: Banks finance oil imports to help build reserves

Govt will be able to save at least $3b in oil purchase bill.

ISLAMABAD:

As foreign currency reserves are at an uncomfortable level, the government has entered into a short-term arrangement with foreign banks for financing oil imports on three-month deferred payment, a step that is expected to give some boost to the country’s reserves.

According to sources, the government is borrowing under FE-25, a deferred payment facility, whereby banks are allowed to utilise and invest their deposits in financing imports.

This arrangement has helped Pakistan State Oil (PSO) and other importers of oil to delay the clearance of letters of credit (LCs), which would have further reduced the foreign currency reserves. “This way, the FE-25 loan has saved foreign exchange temporarily,” an official remarked.

Foreign reserves held by the State Bank of Pakistan (SBP) stood at $3.92 billion on February 28, according to latest data released by the central bank. This amount gives an import cover for only 1.1 months.



Sources said the Ministry of Finance had engaged foreign banks in financing oil imports as they would retire the LCs opened for oil purchases and help build the country’s reserves. This facility started in December 2013 when the reserves had dropped to a very low level.

PSO, which imports 11.2 million tons of petroleum products annually accounting for 50% of total purchases, is already enjoying this facility,” the official said.

Of this quantity, the company imports petroleum products worth $300 million from Kuwait Petroleum Company (KPC). Pakistan’s total oil import bill ranges between $14 and $15 billion per annum.

According to officials, the oil import bill is at least $1 billion per month and this way the government would save $3 billion in three months.

The credit arrangement was based on three-month rollover and after that period, oil importers would pay the amount in installments and get the next three-month facility at the same time, they said.

Meanwhile, the government has sought credit facility for oil imports from brotherly Muslim countries, but no deal has been reached so far.

It is seeking oil supplies on long-term credit valuing about $10 billion from major suppliers – Saudi Arabia and Kuwait. It has approached Riyadh through diplomatic channels, asking it to extend the credit facility from the existing 30 days to one year.

The matter was taken up during the visit of Saudi Foreign Minister Saud Al-Faisal to Pakistan in the first week of January.

At present, Saudi Arabia provides over 10,000 barrels of crude oil per day to Pakistan’s refineries. Annual crude import bill is around $7.5 billion.

Apart from Riyadh, Kuwait has been asked to allow Pakistan to delay payments for oil purchases from the current 60 days to six months, which will help build the country’s foreign currency reserves. Annual oil purchases from Kuwait cost around $2.5 billion.

The existing deal with Kuwait is going to expire in the next six months and negotiations are under way for a fresh one. Pakistan is asking for enhancement in the oil credit facility from other countries as well.

Published in The Express Tribune, March 13^th, 2014.

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