ISLAMABAD: Strugg­ling to compete with a large influx of smuggled products, the oil industry has asked the government to expedite the clearance of over Rs90 billion stuck in foreign exchange adjustment and tax refunds to ease its liquidity challenges.

In a communication to the federal government, the Oil Marketing Assoc­iation of Pakistan (OMAP) has called for the intervention of Minister for Finance Muhammad Aurangzeb to ensure the smooth availability of foreign exchange to secure oil imports and reduce the turnover tax in the upcoming budget to ease the cash flow problems that are currently hindering the industry’s operations.

OMAP Chairman Tariq Wazir Ali has emphasised that the oil industry was currently grappling with a liquidity crisis compounded by various financial obstacles, including substantial holdings in foreign exchange adjustment losses, sales tax adjustments, smuggling of Iranian petroleum products, and the imposition of an unfair turnover tax.

He said that oil marketing companies (OMCs) had been burdened with about Rs26 billion in foreign exchange adjustment losses despite acknowledging flaws in the mechanism by the Energy Ministry and the Oil and Gas Regulatory Authority (Ogra). “The slow rectification process is impeding our operational capabilities and hindering our ability to function effectively”, he wrote.

Moreover, another Rs65bn in sales tax refunds is currently held up, resulting in cash flow disruptions for oil companies. This delay burdened the industry, making it increasingly difficult for OMCs to operate efficiently.

In addition, the rampant smuggling of Iranian petroleum products into Pakistan posed a significant threat to the legitimate operations of OMCs, undermining the national economy and creating an uneven playing field. “This illegal activity results in an annual loss of approximately Rs400bn to the national economy, translating to over Rs1bn per day”, Mr Wazir reported.

As if that was not enough, OMCs were encountering significant challenges pos­ed by liquidity crisis due to substantial amounts tied up in foreign exchange losses and sales tax adjustments. “In these adverse conditions, financial institutions are increasingly hesitant to extend credit lines to OMCs. Consequently, OMCs are struggling to open letters of credit and fulfil other essential financial requirements, further exacerbating their predicament”, he informed the finance minister and other key figures.

The cumulative effect of these challenges has led to a prohibitively high cost of doing business, posing a significant existential threat to OMCs, the OMAP chief said. This predicament was further aggravated by the imposition of the turnover tax, which imposed an additional financial burden, severely impacting the profitability and sustainability of OMCs.

Published in Dawn, May 15th, 2024