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EDITORIAL: The oil industry could not possibly have faced a bigger crisis at the moment than international banks suspending credit lines of Pakistani refineries amid rising concern about overall industry defaults.

This means there’s a very real danger of a breakdown in the energy supply chain in the country at a time when a supply-side oil price shock, coupled with a very questionable politically-driven policy, has pushed inflation up to the highest level in two-and-a-half years at 13.75 percent.

It’s also very surprising that despite the urgency of the situation the Oil Companies Advisory Committee (OCAC) has to go looking for ministers of finance and energy for emergency consultative meetings instead of the government itself taking the lead.

It’s not immediately clear how the State Bank of Pakistan (SBP) tried to help resolve the situation, because news reports suggest that it had little influence on foreign banks and could do little more than request local banks to activate their own links within the global system to “facilitate oil imports of the country”.

OCAC first wrote to the energy ministry (petroleum division) on May 26 to inform them that foreign banks were refusing to confirm letters of credit (LCs) opened by Pakistani banks. Then on May 30 the OCAC chairman issued an SOS call and pointed out that the situation hadn’t improved at all “despite the help from SBP”.

This revelation ought to have caused a frenzy right through Islamabad. Oil is at the centre of the most pressing of the government’s problems, after all, since most inflation-related problems stem from it. And the spectre of further supply shortage because of the industry’s, and indeed the country’s, default risk threatens to maul what supply lines we have in operation.

Pakistan’s credit default swaps, which indicate the risk of a country defaulting, spike to the highest level in a decade this April, then shot almost back to the same levels in May, clearly showing that international financial markets have begun factoring in the outside chance of the country finally defaulting on its debt; something that is not discussed so far, not even in hushed voices.

Finance Minister Miftah Ismail is known to be a very well-trained, no-nonsense economist since well before his rise to the ministry, and a good businessman as well. Surely, he knows that default risk spreads across capital markets like wildfire and now there is a very real danger of contagion.

If the government does not take the matter of LCs up with big banks that have developed a problem with Pakistan, then it’s not just ridiculously expensive oil that we’ll have to handle, but also very steep borrowing costs, ratings downgrade, and a scenario where default might well become a self-fulfilling prophecy. Time is not on our side at all because the government has an uphill battle to tame prices before the next election even without this extra headache.

So they’ll have to work out their options very quickly. Banks should be satisfied with some sort of a sovereign guarantee where their calculations limit exposure to Pakistan’s oil industry. But if the risk spreads more widely in the financial system by the time we take this up with them, and the whole country’s debt profile begins raising red flags in their assessment, then all bets could be off.

It would help, therefore, if we could clinch the Extended Fund Facility (EFF) back in time to address some of the banks’ risk management concerns, but that too requires the proverbial pound of flesh, in the shape of a choking budget, before anything can be decided and nothing at all can be said with any certainty till after the document is officially presented on June 10.

The government has been unforgivably behind the curve on this matter so far. Unless this changes very quickly, the oil industry could be in for a very rough ride.

Copyright Business Recorder, 2022

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Ch K A Nye Jun 04, 2022 08:55am
For all his education and expertise, Mr. Ismail's constraints are: trying to play the politician; trying to please his populist masters and trying to fool the people.
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samir sardana Jun 04, 2022 06:38pm
People are missing out,the Russian oil trade model,with Nayara in India - wherein Nayara in India is importing discounted Russian Oil ! Part 1 Nayara = Russia SO RUSSIA IS EXPORTING DIESEL VIA NAYARA IN INDIA USING RUSSIAN OIL ! SO THE DISCOUNT ON THE RUSSIAN SALE DOES NOT MATTER ! THIS IS THE MODEL ! RUSSIA EXPORTS COMMODITIES TO CHINA AND PAKISTAN (VIA CHINA IN YUAN).BEFORE THAT RUSSIA TAKES EQUITY STAKES IN THE USERS OF THE COMMODITIES AT A VALUATION (ON PRE-COMMODITY SALE BASIS) RUSSIA DOES NOT INJECT ANY CAPITAL AFTER THE 1ST SALE - THE CHINESE/PAKISTANI USER,MAKES THE 1ST CALL NOTICE ON THE EQUITY ALLOTTED TO RUSSIA.THIS CALL NOTICE,IS MET MY APPROPRIATING,5% OF THE SALE VALUE OF THE COMMODITIES,BY RUSSIA. THEREAFTER,THE COMMODITIES ARE PROCESSED AND SOLD/EXPORTED,AND RUSSIA GETS A STAKE IN THE PROFIT,AND AFTER 5 YEARS,THE LOCAL PLAYER BUYS OUT,THE RUSSIAN STAKE.dindooohindoo
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samir sardana Jun 04, 2022 06:38pm
Part 2 SO RUSSIA RECOVERS THE DISCOUNT IN THE SALE OF COMMODITIES AND OIL - BY SEVERAL TIMES, AND THE MONEY IS IN YUAN AND IN CHINA - THE SAFEST HUB - WHERE NO FREEZE WILL WORK - AND THE YUAN WILL STRENGTHEN VIS--VIS THE USD IN 5 YEARS. THIS IS ALSO THE MODEL TO BE USED WITH PAKISTAN-RUSSIA - AND TO THE EXTENT THAT PAKISTAN CAN EXPORT FOOD,DRUGS AND ORDINANCE TO RUSSIA - THE TRADE CAN BE IN PKR IS THIS THE TIME FOR RUSSIA TO LICENSE MILITARY TECH,TO PAKISTAN ORDINANCE,FOR MASS PRODUCTION AND EXPORT TO RUSSIA - VIA CHINA ? dindooohindoo OPPORTUNITIES !
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