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Circular debt affects POL imports

November 13, 2008

ISLAMABAD, Nov 12: The import flow of crude and finished petroleum products to Pakistan has been hit hard by circular debt, which has now crossed Rs192 billion.

Sources in oil marketing companies (OMCs) told Dawn on Wednesday that in the last ten days alone, the circular debt — which the consumers owe to OMCs and the latter to refineries — has surged by Rs35billion.

The Pakistan State Oil (PSO), which imports 80 per cent of the country’s total petroleum products, is facing problems in honouring its LCs. The negotiating banks are increasingly getting hesitant to confirm LCs to the suppliers due to unstable and tight credit conditions in international banking and a possible further decline in Pakistan’s credit ranking in the coming days by international credit rating companies.

By the end of last month, Moody had downgraded Pakistan’s credit rating from B2 to B3.

Almost all the refineries and oil marketing companies are facing problems in convincing banks to confirm their LCs, while importing crude and finished products.

In the meanwhile, the debt issue has been haunting OMCs and refineries. At present, OMCs owe Rs77 billion to refineries, while consumers (mostly institutions and organisations) have to pay Rs85 billion to OMCs.

“It’s a catch 22 situation,” PSO’s official spokesman, Amir Abbasi told Dawn. The system, he said, needed reduction in debt load.

In response to a question, Mr Abbasi said that Rs82 billion of PSO was stuck with power generation companies and government departments and institutions.

With the sharp decline in electricity generation from hydel sources, power generation through furnace oil and gas have been increased to bring down daily load-shedding hours from 11 to six and keep industries running.

The PSO spokesman said that as winter was around the corner and domestic gas consumption would see a surge, power generation through furnace oil had to be increased further.

Sources told Dawn that the Oil Companies Advisory Committee (OCAC) has informed the prime minister about the issue and sought his intervention.

They said that that debt has also affected the operations of Pakistan’s leading refinery, Pak Arab Refinery Company (Parco). The company refines 100,000 barrels a day of crude.

Commercial players, like Shell and Caltex are, however, not being affected by the circular debt issue as at present, the government has to pay only Rs10 billion in price differential claim (PDC), or subsidy for selling products at discount.

Since Oct 16, the government is not paying any subsidy on petroleum products to consumers.On Oct 30, the OCAC had also written a letter to the prime minister and sought his intervention in resolving the debt issue.