OICCI seeks revision in OMCs’ margins | The Express Tribune


ISLAMABAD:

As the government looks for second good news to stabilise the sinking rupee, a representative body of the mighty Pakistanis and foreign investors on Thursday demanded that the government immediately build the impact of rupee depreciation in prices of petroleum products.

The Overseas Investors Chamber of Commerce and Industry (OICCI) termed the rupee’s decline “very harmful” for the economy.

The OICCI’s demand came the day the rupee fell below Rs174.2 to a dollar – the lowest value of the local currency for the second time in the past 17 days.

On October 26, the rupee dipped to a historic low of Rs175.3 against the dollar before posting a recovery on the back of $4.2 billion bailout package announced by Saudi Arabia.

Pakistan is now making efforts to announce the second good news from the same event – the Saudi Arabian package to provide breathing space to the struggling economy.

Both sides are taking time to fulfill procedural formalities for $3 billion in cash deposit and making the $1.2 billion oil facility operational, sources told The Express Tribune.

State Bank of Pakistan Governor Dr Reza Baqir is in Saudi Arabia while Economic Affairs Minister Omar Ayub is making efforts to make the $1.2 billion oil facility operational.

The Saudi package became critical due to the delay in reaching a deal with the International Monetary Fund (IMF), which is also adding pressure on the rupee value.

“Pakistan has an import-based economy and rupee devaluation is very harmful for it,” said Ghias Khan, President of Engro Corporation, one of Pakistan’s leading conglomerates, while sharing key recommendations of the OICCI with mediapersons.

Heavy reliance on imported fuel in the energy mix has also contributed to expensive electricity, said Khan. Around 11.5% share in the import bill of Pakistan is held by the fuel needed for electricity generation.

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The OICCI has demanded that the government revise profit margins of oil marketing companies by adding the impact of rupee devaluation to the cost of fuel. It unveiled the salient features of “OICCI Energy Recommendations 2021”.

Since September 2020, the government has shifted the price mechanism from monthly to fortnightly basis and also changed the price benchmark based on PSO’s oil import to Platt’s Index plus PSO’s average premium and incidental costs.

“The price structure of petroleum products should cover all incidental costs, forex adjustments for imports in the period concerned and assure sustainable and reasonable profitability for the oil marketing companies,” it added.

“The foreign exchange impact should be based on the average of the previous fortnight exchange rate announced by the SBP instead of the notional one based on PSO’s cargo and actual import incidentals.”

OMCs’ margins should cover all costs including demurrage, operating cost and 20-day inventory, the OICCI recommended.

The demand may increase problems for the government that has lost a lot of political capital due to its unpopular decision to increase petroleum product prices at midnight.

The OICCI has also sought to expedite the process to set up new LNG terminals in the country, foreseeing significant locally produced gas shortages.

Gas demand will grow to 6 billion cubic feet by 2030 but the locally produced gas supplies will only be equal to 1.4 billion cubic feet and meet just 20% of the demand, it added.

The existing LNG terminal capacity of 1.23 billion cubic feet will be insufficient to bridge this gap and the country needs to install new terminals. No new terminal will come on line by 2024 when the import requirement will be 2 billion cubic feet, it added.

The OICCI said that due to the lack of planning, there would be four gigawatts or 25% surplus electricity by 2025, which would increase the fixed power cost by Rs5.1 per unit.

It estimated 25% lower capacity payments, had there been robust electricity demand in the country.

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There is a need to introduce demand creation measures in line with the National Electricity Policy by transitioning from single government buyer to multi-buyer model, according to the OICCI.

The OICCI has also demanded reduction in electricity prices for the export-oriented sector, citing that prices in Pakistan were 30% higher than the regional countries. High electricity prices have forced domestic consumers to shift to solar power solutions and dampened foreign investment due to high cost of operations.

The inefficiency by the distribution companies would add another Rs1.5 trillion to the circular debt by 2025, as these loss-making entities caused Rs219 billion losses in fiscal year 2019-20, said the OICCI.

OICCI Secretary General Abdul Aleem added that Pakistan should leverage the global resolve to combat climate change and take benefit of the pool of funds available for investment in renewable energy (RE), such as Green Climate Fund (GCF), to underwrite debt issued by local/foreign banks. He argued that this would encourage more investments and widen the renewable energy footprint resulting in lower cost of power.

Furthermore, increasing power generation from renewable energy is also critical for achieving net zero carbon emission by 2050 as per the Paris Climate Agreement.

Published in The Express Tribune, November 12th, 2021.

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