March 23, 2023
Banking Pakistan

Pakistan Braces For Fuel Shortages Amid Liquidity Crisis

Pakistan can face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves, foreign media said quoting traders and industry sources.

Pakistan is facing a balance of payments crisis and the plummeting value of the rupee is pushing up the price of imported goods. Energy comprises a large chunk of Pakistan’s import bill. Pakistan typically meets more than a third of its annual power demand, using imported natural gas, prices for which shot up following Russia’s invasion of Ukraine. “There is no shortage this fortnight. If we don’t have LCs (letters of credit) open right now, we might see shortages in the next fortnight,” a senior official at one of the oil companies said.

A letter of credit issued by the importer’s banks is a standard form of payment guarantee in the oil trade to the exporter. Oil traders, however, are shunning countries such as Pakistan and Sri Lanka due to an acute shortfall of foreign exchange. The state-owned refiner Pakistan State Oil (PSO) and Pakistan LNG Ltd have left a flurry of fuel tenders unawarded in the last couple of months.

The sudden steep depreciation of the rupee against the dollar has caused a colossal loss of billions of rupees to the country’s oil industry, putting it on the brink of collapse. And more importantly, in the wake of recent devaluation alone, LC limits have overnight shrunk by 15-20%.

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