ISLAMABAD, Sept 16 Pakistan State Oil (PSO) is on the verge of default on the letter of credit (LC) worth Rs12 billion due to delay in launching of TFCs to clear the circular debt.

Sources in the petroleum ministry said that the state-owned oil marketing company was facing severe liquidity shortage due to circular debt.

A senior PSO official confirmed to Dawn on Wednesday that payments for the four shipments of furnace oil imported from the UAE were overdue on September 17 and the company was not in a position to clear the amount to the contractors.

The official said the two-week delay in launching of the Term Finance Certificates had created serious financial crunch for the largest furnace oil and diesel importer in the country.

“PSO was counting on the book clearance after the issue of TFCs but the delay has led to the default on its letter of credit,” the official said.

Pakistan has a special arrangement with the Kuwait Petroleum Company to make payment for import of diesel in rupees. But the heavy furnace oil imports for power generation are draining the county's dollar reserves.

A finance ministry official told Dawn that the TFCs launch had been delayed due to procedural formalities. “Paperwork has been completed and signed by the stakeholders and the 18 banks,” said the official, adding the disbursements of TFCs are expected to be made on September 18.

“If a last minute rescue is not made the default on the LC would bring a bad name to the company and the country,” said the PSO official.

The contractors have given credit time of 21-30 days for payment of furnace oil and in case of default they would back off from entering into any kind of supplies to Pakistan and some of them may impose penalties between 0.5 per cent and 1.0 per cent for future contracts with the PSO,” the official warned.