ISLAMABAD: Amid looming international default threat on national fuel supplier — Pakistan State Oil (PSO) — owing to a record Rs775 billion receivables, the government on Tuesday approved extending sovereign guarantee for Rs50bn commercial borrowing and fixed Rs8,500 per 40kg minimum intervention price for raw cotton known as phutti to revive a faltering cash crop.

The decisions were taken at a meeting of the Economic Coordination Committee (ECC) of the cabinet, presided over by Finance Minister Ishaq Dar, which also extended the deadline for export of sugar by 15 days and granted a supplementary grant of Rs10bn to the National Disaster Management Authority (NDMA) to support humanitarian activities in flood affected Turkiye and Syria.

The meeting was informed Pakistan’s cotton production had dropped gradually from a peak of 14.1 million bales in 2004-05 to 7 million bales in 2020-21 as low-profit margins compelled farmers to switch to other crops like rice, maize and sugarcane. The crop output improved to 9.45 million bales in 2021-22 as the government supported through intervention price but dropped again to 4.75 million bales in 2022-23 against a target of 9m bales owing to devastating floods.

The Ministry of National Food Security and Research (MNFSR), after consultation with cotton growers and the textile industry, advocated that cotton production could be increased to 15 million bales over a short period to meet the industry’s requirement, currently met through $6bn imports, provided price intervention policy was supported.

Fixes phutti support price at Rs8,500; extends sugar export deadline

The stakeholders’ consensus was reported at an intervention price of Rs8,500 per 40 kg which should be announced ahead of the sowing season, which starts in March to May, to encourage farmers to bring more area under the crop.

The ECC approved the intervention price at Rs8,500 per 40 kg with the expectation to enhance yield and area by 10-15pc which will remain in place until Dec 31. The ECC also directed MNFSR to constitute Cotton Price Review Committee (CPRC) with a mandate to review market prices and adjust the intervention price accordingly.

PSO bailout

The ECC was informed that PSO was importing 8-9 cargoes of Liquefied Natural Gas (LNG) per month from Qatar and was obligated to clear its international invoices within 15 days. The fuel supplier last week “conveyed SOS call for funds because its liquidity position is under severe stress as receivables touched Rs775bn” with a major Rs498bn contribution from Sui Northern Gas Pipelines Ltd (SNGPL) which increased by Rs211bn since April 2022.

PSO said its borrowing had also reached an all-time high at Rs411bn, resulting in an increased financial cost of Rs43bn for the current fiscal year and Rs73bn for 2023-24 which would completely wipe out its profitability. It said the Ministry of Finance had also not been releasing subsidies on time on account of over Rs40bn for the export sector, Rs26bn for fertiliser sector and over Rs200bn cost of diversion of LNG to domestic consumers.

The ECC had allowed sovereign guarantees for Rs50bn borrowing in the first week of January but the finance ministry took more than six weeks to issue a letter of comfort (LoC) in this regard. PSO reported that even with that “Rs50bn commercial borrowing, there is not much improvement in its liquidity requirements leading to possible default in international payment obligations”.

An urgent huddle at the finance ministry ahead of the ECC meeting concluded that SNGPL should be given a sovereign guarantee and LoC to raise Rs50bn from the market for payments to PSO.

“In order to enable PSO to remain afloat in its payment obligations to LNG suppliers and to continue LNG supply chain, the ECC allowed a sovereign guarantee in favour of SNGPL for commercial borrowing of Rs50 billion on immediate basis”, said an official statement.

The Ministry of Commerce told the meeting that ECC had allowed the export of 250,000 tonnes of sugar on Jan 11 within 45 days through the allocation of quota by provincial cane commissioners with the condition that export proceeds should be realised in advance through banking channel or within 60 days of the opening of LCs for export. Therefore, on the recommendation of the ministry of commerce, the ECC allowed an extension from 45 to 60 days time limit for shipment of sugar from the date of quota allocation.

Published in Dawn, March 15th, 2023