The Oil Companies Advisory Council (OCAC) has sent a note of caution to the Oil and Gas Regulatory Authority (Ogra) and the energy ministry that the oil sector is on the brink of collapse due to a massive rupee plunge over the last few days, despite an eight per cent month-on-month recovery in oil sales last month.
The country’s overall oil sales (petrol, diesel and furnace oil) stood at 1.44 million tonnes in January, as against 1.33m tonnes in December 2022, while sales posted a drop of 19pc to 10.47m tonnes during the first seven months of the current financial year (2022-23). The figure was 13m tonnes for the same period last fiscal year.
The OCAC informed the government that the sudden rupee depreciation against the dollar had caused losses totalling billions of rupees as letters of credit (LCs) were expected to be settled on the basis of new rates, whereas the related product had already been sold.
These losses would have an impact on profitability and viability of the sector as in some cases the losses might exceed the entire year’s profit, the letter said.
Although compensation for foreign exchange losses is allowed for LCs up to 60 days using Pakistan State Oil (PSO) as a benchmark as per Economic Coordination Committee’s approval of April 1, 2020, other member companies are unable to recover their entire losses due to import profile differences with PSO.
The OCAC asked Ogra to immediately revise this mechanism and ensure that exchange losses of the sector are fully reimbursed if the viability of the sector and supplies to the retail outlets are to be ensured.
The committee requested the government to urgently revise this mechanism and ensure that exchange losses of the sector were fully reimbursed so that the industry remained viable and supplies to retail outlets remained uninterrupted.
“Due to challenges still being faced by the sector of previous exchange rate adjustments and the enormous impact of the current depreciation,” the OCAC urged the regulator to pass the impact of exchange rates in one go instead of staggering it.
According to the OCAC, the trade finance limits available from the banking sector to the industry have become inadequate due to an increase in oil prices and depreciation of the rupee over the last 18 months.
As a result of the recent devaluation alone, the LC limits shrank overnight by 15-20pc, it added.
“In order to ensure the import of adequate products into the country, it is important to increase the trade finance and LC limits in line with current oil prices, exchange rate and volumes being handled by each company,” the OCAC said.
The committee said the banking sector should be requested to raise the limit of OCAC member companies.
According to Insight Research, the government is likely to collect Rs299bn in the first seven months of the current fiscal on account of petroleum development Levy (PDL). Currently, the government is collecting Rs50 per litre as PDL on petrol and Rs40 on high speed diesel. Even with a maximum possible levy, (Rs50 litre), the government is unlikely to achieve its budgeted target of Rs855bn.
The IMF has been pushing for more stringent measures to bridge the tax shortfall, such as an increase in PDL limits and the imposition of a general sales tax.
