Too tight fiscal space: MoF bans SGs, subsidies
- Cites limited fiscal space and cap on expenditures as reasons
ISLAMABAD: Ministry of Finance (MoF) has reportedly banned supplementary grants (SGs) and subsidies due to limited fiscal space and cap on expenditures, well informed sources told Business Recorder.
This message was conveyed by the Finance Ministry during a meeting held with respect to financial issues of Pakistan State Oil (PSO).
On March 14, 2023, Petroleum Division noted to the ECC that PSO was engaged in importing Liquefied Natural Gas (LNG) in the country to meet the energy requirements of the country. The Re-gasified LNG (RLNG) was predominantly purchased by SNGPL for onward sale to its consumers.
On an annual average, power sector consumes up to 70% of RING whereas balance of RLNG was supplied to industry export, industry non-export, fertilizer, commercial sector, CNG, cement and domestic (supply volume increases in winters). SNGPL’s supplies RLNG at subsidized prices to export industry and fertilizer, with recovery always contingent upon budgeted subsidy.
Two fertiliser plants, domestic sector: PSO needs Rs39bn for payment obligations and sustaining LNG supply chain
It was highlighted that in the case of export industry, the budgeted subsidy during the CFY was Rs.40 billion which was sufficient to meet SNGPL’s requirement. However, there were pending claims of Rs.25.059 billion against subsidized supply of RLNG to two fertilizer plants, i.e., Fatimafert Ltd and Agritech Ltd until January 3, 2023 when ECC decided to discontinue subsidized RLNG supplies to both plants. Against RLNG supplies to power sector, SNGPL’s payments are overdue and were not being fully realized on timely basis.
LNG diversion to domestic sector in winter months always carries a tariff differential which had accumulated to Rs.200 billion up to February 2023, whereas the budgeted subsidy for addressing this differential was Rs. 25 billion during CFY. Petroleum Division was only able to release Rs. 12.50 billion after approval of the Finance Division. During period Mar-23 to Sept-23, maximum LNG was being imported by PSO in terms of number of LNG cargoes under long term contracts with Qatar Energy.
Petroleum Division further stated that under the term contracts, the delivered cost of each cargo at present price for the month of February 2023 @ $ 12.7148/ mmbtu comes out to be $ 41 million so the cumulative financial impact of forex on nine cargoes per month comes out to be $ 369 million per month.
PSO was importing 8-9 LNG cargoes per month whereas as per the executed contracts with LNG suppliers, PSO was obligated to clear the invoice on 15th day after completion of unloading of cargo and/ or 10th banking day after receipt of invoice from supplier, whichever was later.
PSO had conveyed a SOS call for funds considering the fact that PSO’s liquidity position was under severe stress as receivables were at all-time high of Rs.773 billion with major contribution from SNGPL, i.e., Rs.498 billion and rising (increase of Rs.211 billion since April, 2021). On the other hand, PSO’s borrowing reached Rs.411 billion leading to increased finance cost of Rs.43 billion for CFY and Rs.73 billion projected during FY 2023-24, which would completely erode the profitability of PSO moving forward.
The ECC was further informed that funds release out of the budgeted subsidies is being delayed by the Finance Division owing to constrained fiscal space and limit on expenditures leading to accumulation of subsides of Rs. 14.45 billon against export sector and RLNG diversion.
The sources said that ECC in its meeting held on January 03, 2023 while considering a summary of the Petroleum Division approved borrowing of Rs.50 billion in favour of PSO backed by sovereign guarantee. PSO was in process of borrowing the funds as the letter of comfort was issued by Finance Division on February 15, 2023.
However, PSO was of the considered view that even with the recent arrangement of ECC approval of Rs.50 billion commercial borrowing, there was not much room for improvement in its liquidity requirements leading to possible default in its international payment obligations.
Petroleum Division apprised that in order to deliberate on the issues raised by PSO in its SOS call, Finance Division on the request of Petroleum Division held a meeting on March 14, 2023, which was attended by Minister of State on Petroleum, Special Assistant to the Prime Minister on Finance, Secretary Finance, Special Secretary Finance, Secretary Petroleum along with MD-PSO, DG (Oil), DG (Gas) and CFOs of PSO and SNGPL.
PSO, in its SOS call also proposed imposition of levy at Rs 10 per litre on MOGAS and diesel to raise Rs 100 billion to avert international default. This proposal has yet not been considered by the decision makers.
During the said meeting it was agreed that given the limited fiscal space available and cap on the expenditures there was no room available for any supplementary grants or subsides by the Finance Division, the sources added.
However, owing to retirement of some of already issued sovereign guarantees, Finance Division could explore the option of issuance of sovereign guarantee for raising commercial loan up to Rs. 50 billion to ease the liquidity issue being faced by PSO.
In order to enable PSO to remain afloat in its payment obligations to LNG suppliers, and to avoid any threat towards breakdown of LNG supply chain, Petroleum Division submitted following proposals to the ECC for consideration: (i) Finance Division to provide sovereign guarantee along with letter of comfort in favour of SNGPL for commercial borrowing of Rs. 50 billion on immediate basis; (ii) both SSGCL and SNGPL would also consider commercial borrowing of another Rs. 50 billion based on their balance sheets; (iii) OGRA to allow the cost of borrowing of both the gas companies in the revenue requirements; and (iv) Power Division may be advised to timely clear its invoices against supply of RLNG to power plants and accumulation of backlog may be avoided.
After detailed deliberations on the financial woes of PSO, the ECC approved all recommendations submitted by the Petroleum Division.
Copyright Business Recorder, 2023