EDITORIAL: The supply chain in various industries is at the risk of choking under import restrictions by State Bank of Pakistan (SBP). The one key industry allowed to import the real need is petroleum, but disruption risks in the industry are growing on a daily basis. Although the country has enough stocks to cover three weeks’ demand, the supply is getting expensive while the risk for the oil marketing companies (OMCs) is growing. In the event of a petroleum shortage, the supply chain of every commodity – especially food—can come under acute stress. The sowing of the wheat crop could also be adversely affected, adding to challenges to food security.
The actual margins of OMCs are shrinking, and the credit lines are choking while the government often uses funds for the inland freight equalisation margins (IFEMs) and exchange adjustments to compensate for the lower increase in consumer prices. Sometimes it impacts the cash flows of local refineries, and in other instances, the hit is on the OMCs. The issues are mani-fold from extreme volatility in the exchange rate, a rise in the international crude prices, and higher charges of Letters of Credit (L/Cs) confirmation to an absolute increase in retail prices in PKR. Every issue has its own dimensions, so to speak.
The recent hit is higher exchange losses due to the sharp depreciation of the Rupee, where the impact passed on to the OMCs is on the average basis, and actual recovery would come later. This is creating a cash flow crunch for some OMCs – especially the smaller ones. Usually, such cash flow interruptions are overcome through bank borrowings. But that is not easy when interest rates are in the twenties (as a percentage) amid higher working capital needs. It is incredibly costly to borrow at such high rates; even banks are reluctant to offer additional financing. This may well send some smaller OMCs packing and force the bigger ones to limit their operations.
There is another issue of higher charges of LC confirmation with the country’s credit rating downgrades and an increased risk of sovereign default. Not every foreign bank is entertaining LCs from Pakistan, and those who have no qualms about LCs or the country are demanding a premium. This all adds to the cost.
The IFEM has been set low to keep the increase in prices of petroleum in check, which impacts cash flows of refineries that are already facing higher interest rates and limiting credit lines. The government needs to wake up and work on solutions along with SBP and the scheduled banks before the the current situation leads to widespread energy shortages that will adversely impact food supply, and internet connectivity besides a slew of other activities within the economy.
Oil Companies Advisory Council (OCAC), an association of OMCs and refineries, has warned of a severe disruption in the supply of petroleum products if the issues as cited above are not addressed immediately. The government should take their warning seriously and start work on a holistic plan. First, it should show some spine and pass the impact of price increase onto consumers as this would keep the petroleum sector afloat and rationalize the demand. Then the government should work on bringing the working week down with options of working from home and should do the same for schools, colleges and universities. Finally, malls and commercial areas should have limited timings, and travel on private vehicles on highways should be taxed higher.
The ostrich-like behaviour is in fact causing more damage. A shortage of petroleum products in the country would create panic and result in economic chaos that may lead to grave social unrest. The government, therefore, must stop refusing to face reality or recognizing the truth.
Copyright Business Recorder, 2023