Foreign banks have stopped offering trade credit for oil imports to Pakistani refineries and suppliers are seeking payments upfront to avoid any potential problems resulting from the political turmoil that is currently prevailing in the country. A source from the oil sector told a local news publication; “The politically-tense Pakistan is likely to face fuel shortages in days to come as international banks have refused to confirm the letter of credits (LCs) for oil import orders citing “high country risk” alert.”
Trade credit for oil imports in jeopardy
As per the rule, LCs are opened by the local banks for the import of crude oil from the global market, but, international banks confirm the LCs of local partners in order to provide a guarantee to the exporter. Under the guarantee, if a Pakistani bank defaults on a payment to an exporter, its international counterpart pays the amount. But, due to the ongoing political situation and tumbling economy, the situation does not seem good for the market. As the source said; “The deadlock has created a serious credibility crisis for the country in the global market.”
Talking about the Srilankan crisis, the source said that Pakistan is looking like another country to face the same situation in the coming days. “Following the Sri Lanka default, an overall negative environment emerged in Pakistan, being perceived as the next country heading towards a default after a serious balance of payment crisis and a huge erosion of foreign exchange reserves. This situation has not only severely dented Pakistan’s credit rating, but it also has added to the country’s risk especially for confirming the LCs,” it added.
Oil refineries are in serious trouble
The sources said that in particular, three refineries are in utmost trouble due to non-confirmation of their LCs, their planned crude oil cargoes would not arrive in Pakistan, resulting in reduced refining operations. It is pertinent to mention here that Pakistan is already struggling to ensure a smooth supply of petroleum products in view of their rising global prices and the government’s policy to keep the prices low through subsidies on petrol and diesel. The source disclosed that the oil sector has taken up the issue with the government and Secretary Petroleum held a meeting with the oil sector people to resolve this issue the Secretary Petroleum has assured the appropriate action is being taken to resolve the issue.