Oil sector faces liquidity crunch, fuel supply at risk

Tanveer Malik
Tuesday, Aug 29, 2023

KARACHI: The oil sector is facing a severe liquidity crunch as the rupee's sharp depreciation has shrunk its credit lines and made it harder to import crude oil and petroleum products, industry sources said on Monday.

The sector also fears a possible shortage of fuel in the country if banks do not

increase their lending limits for oil imports, which are vital to meet domestic demand.

Oil sector companies are approaching the central bank to take action in this regard. Representatives from different companies are meeting with central bank and commercial bank officials separately to resolve the issue.

"We met with the top executive of a commercial bank on Monday and will be meeting with central bank officials on Tuesday to seek help in increasing our credit lines for crude oil imports," said a senior official of a local refinery, who declined to be named.

The rupee has lost more than 25 percent of its value against the dollar since January 1, 2023, making imports more expensive and hurting the profitability of the oil sector. It closed at 302 in the interbank market and 319 in the open market on Monday.

"A cargo of crude oil that used to cost Rs5 billion a few months ago now costs Rs15 billion, after the currency slide and a surge in global oil prices to $90 per barrel from $50-60," the official said.

Another industry source said one of the refineries had stopped processing due to insufficient funds to import crude oil. The oil sector needs commercial banks to increase their exposure to the sector by enhancing their credit limits, the source said, adding that foreign exchange requirements were already hard to meet due to a dollar shortage in the country.

"The foreign exchange requirements are already being met after great difficulties as the dollar crisis in the country is not making it easier for the oil sector to arrange the sufficient funds in foreign currency in the given time, often resulting in delays in the confirmation of letters of credit (LCs) by foreign banks," the source said.

"Now, the limited credit lines in Pakistani rupees are adding more salt to the wounds of the sector." "Banks have become very cautious in lending to the oil sector after the collapse of a leading oil marketing company a few years ago," the source said.

Industry officials fear a shortage of petroleum products if the situation does not normalise sooner rather than later, as the sector would not be able to import the required quantity of oil for domestic needs.