Islamabad:
The Prime Minister’s Office approached the Directorate of Petroleum to draw its attention to the irreparable exchange loss of Rs 26 billion faced by the petroleum industry.
It has also pointed to the reduced sales tax, which is preventing recovery of sales tax paid, resulting in a holdback of Rs 65 billion, which has affected cash flow.
The oil industry is seeking the government’s intervention to address several issues, including foreign exchange loss that has risen to Rs 26 billion.
The Prime Minister’s Office, in a memorandum, said the president of the Oil Marketing Association of Pakistan had pointed out the challenges faced by the emerging oil marketing companies (OMCs), especially in terms of capital management due to structural problems in the industry.
It said the oil industry claimed that foreign exchange losses that had accumulated to Rs 26 billion have not been recovered due to flaws in the foreign exchange gain/loss recovery mechanism.
He also drew attention to the impact of the sales tax cut. The OMCs say that due to the reduction in sales tax on petroleum products, they are unable to recover the sales tax paid, resulting in Rs 65 billion of funds being stuck and affecting their cash flows. These funds are held in the inland freight equalization margin (IFEM).
In this regard, “views/comments are requested to be provided on the matter to this secretariat, preferably by June 12, 2024,” the Prime Minister’s Office said.
Earlier, in a letter to the top military leadership, the president of the Oil Marketing Association of Pakistan appreciated the initiative to set up the Special Investment Facilitation Council (SIFC) to attract foreign investment and boost the confidence of foreign investors in its economic potential Pakistan.
“It is also imperative to consider the environment for our local investors who have already invested significant resources and have shown readiness to advance their investments,” the oil industry said, adding that their business and other emerging OMCs face structural problems, especially with regard to fund management.
Huge sums of money needed to facilitate foreign investment deals had been inexplicably withheld by government authorities, it said.
Although the Ministry of Energy (Department of Petroleum) and the Oil and Gas Regulatory Authority (Ogra) acknowledge the existing flaws in the mechanism and acknowledge that companies have suffered losses as a result, they are reluctant to address them and expedite the compensation process.
These uncollected amounts are a significant part of the working capital of the companies, thereby significantly affecting their operational efficiency.
The reduction of sales tax on petroleum products (gasoline and high speed diesel) to zero prevented them from recovering the sales tax paid.
At present, the industry is facing a major impact with funds worth Rs 65 billion being held back, severely affecting their cash flow. Government authorities acknowledge that funds are stuck, but refunds are delayed by excessive red tape.
He said in a letter that AMS were experiencing disruption to their cash flows as funds were held in IFEM. The value of the funds received was significantly reduced due to the delay in the IFEM audit, which spanned an eight-year period.
Since the oil trading sector is highly dependent on imports and transactions are conducted in US dollars, this delay has had negative consequences.
The oil industry said the challenges were affecting the entire industry and resulting in excessively high mark-up costs for stranded funds. Although government authorities were aware of the issues, they were reluctant to address the underlying problems, “which now puts the industry at risk of survival.”
“It is important to recognize that these challenges not only harm the economic well-being of the industry, but also act as a major barrier to attracting foreign and local investment in Pakistan’s energy sector,” the industry said.
“Addressing these issues is critical to creating an environment that promotes sustainable business growth and instills investor confidence.”
Published in The Express Tribune, June 8u2024.
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