KARACHI/ISLAMABAD: Pakistan's oil firms have issued a warning that the sector is "on the brink of collapse" as long as the dollar liquidity crisis continues and their costs of doing business skyrocket as a result of the devaluation of the rupee.

The government lifted the dollar limit in response to the International Monetary Fund's (IMF) request, which caused the rupee to plunge to a record low of Rs276.58 in the interbank market.

The Oil Companies Advisory Council (OCAC) claimed in a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry that the "sudden depreciation" of the local rupee has resulted in losses to the industry amounting to billions of rupees because their letters of credit (LCs) are anticipated to be settled at the new rates, "whereas the related product has already been sold."

Due to declining foreign exchange reserves, which as of January 27 were only $3,086.2 million and sufficient for 18.5 days, the government has also imposed restrictions on LCs.

Due to the rupee's sharp decline in value, Pakistan is currently experiencing a balance of payments crisis, which is driving up the cost of imported commodities. A significant portion of Pakistan's import bill is made up of energy. Over a third of Pakistan's annual power needs are normally met by imports of natural gas, the cost of which skyrocketed when Russia invaded Ukraine.

The OCAC claimed that these losses have an effect on the sector's viability as well as its profitability, which is already under great pressure. In some cases, these setbacks may even exceed the "entire year's profit.

"If the industry's sustainability and supplies to retail outlets are to be ensured, it is demanded that this procedure be quickly revised and that the sector's currency losses be properly reimbursed, the OCAC warned the authorities.

According to the letter, OGRA has embraced the practise of not completely passing on the effects of the depreciation of the rupee and instead burdening the industry.

The OCAC stated that it is imperative that OGRA passes the impact of the exchange rates in one go and not stagger this compensation due to the difficulties still being experienced by the sector as a result of prior exchange rate adjustments and the significant impact of the current depreciation.

The council also stated that as a result of rising oil prices.According to the OCAC, the LC limits have decreased by 15-20% over night as a result of the most recent devaluation alone.

"It is vital to increase the trade finance/LC limits of the industry in line with the current oil prices, currency rate, and the volumes being handled by each company in order to enable the import of adequate products into the country."

If the aforementioned issues are not addressed right away, the industry is in danger of collapsing, the colleague continued.

Oil refinery Cnergyico informed the Petroleum Division that it will suspend operations for more than a week hours after the letter was received.