Pakistan braces for fuel shortages amid liquidity crisis

© Reuters. FILE PHOTO: People wait their turn to get fuel at a petrol station, in Karachi, Pakistan June 2, 2022. Picture taken June 2, 2022. REUTERS/Akhtar Soomro/

By Ariba Shahid and Mohi Narayan

KARACHI (Reuters) - Pakistan could face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves, traders and industry sources said.

    The South Asian nation is facing a balance of payments crisis and the plummeting value of the Pakistani 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 told Reuters.

    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. Pakistan on Sunday raised petrol and diesel prices by 16% to 249.80 Pakistani rupees ($0.9373) a litre and is in talks with the IMF to unlock a suspended bailout package. 

    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. [FUEL/TENDA][MOG/TENDA][MDIS/TENDA]

    At an industry meeting on financial challenges faced by fuel importers, State Bank of Pakistan officials cited "severe liquidity issues" faced by the country for delays in the opening of LCs, according to a Jan. 19 letter from Imran Ahmed, director general of oil, reviewed by Reuters.

    At the same meeting, the managing director of PSO said a gasoline cargo due for loading on Jan. 13 has already been cancelled due to the non-opening of LCs. "He added that the country is having limited stocks and such a situation can lead to dry out," according to the letter.    

    Previously, the Oil Companies Advisory Council (OCAC), representing Pakistan's refining, pipeline, and marketing companies, also flagged that delays in the opening of LCs could "lead to a fuel shortage in the country".

In a Jan. 13 letter to the Ministry of Finance, OCAC said Pakistan needs to import around 430,000 tonnes of gasoline, 200,000 tonnes of diesel, and 650,000 tonnes of crude oil every month, costing $1.3 billion to meet local demand.

    "If LCs are not established on a timely basis, critical imports of petroleum products would be impacted which may lead to a fuel shortage in the country," the OCAC said.

    Pakistan bought only 223,000 tonnes of gasoline in December versus 608,000 tonnes in the same period a year earlier, data from Kpler showed. In January this year, the country was projected to import 270,000 tonnes of the fuel, compared with 393,000 tonnes in the same month in 2022, the data showed.

    Some banks have denied delays in issues of LCs, while SBP did not respond to a Reuters email seeking comment.

    "If there are no issues with LCs in Pakistan then why was the SBP (State Bank of Pakistan) and sector been holding meetings all of last week?," a senior official from one of the oil companies said.

    PSO said last week it was ensuring a seamless supply of gasoline and gasoil across the country and had ample stocks.

    It also said its import cargoes were arriving smoothly as planned. 

($1 = 266.5000 Pakistani rupees)