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Just One Foreign Bank Okays LCs for Pakistan’s Crude Oil Imports While Others Refuse

Following the refusal of other players, Saudi Arabia’s Al-Rajhi Bank is now the only foreign bank currently confirming letters of credit (LCs) for Pakistani crude oil imports.

Foreign banks have been unwilling to confirm letters of credit for crude oil imports for several months due to Pakistan’s looming dollar crisis. Other banks, with the exception of Al-Rajhi Bank, declined to assume the liability, reported The News.

The issue of foreign banks refusing to confirm letters of credit first arose in May of last year when some banks refused to confirm LCs for oil imports. With the escalation of the dollar crisis, the country is now left with only one bank responsible for confirming letters of credit for crude imports. This issue was raised with the governor of the State Bank of Pakistan (SBP) when the oil sector delegation informed him of the sector’s problems.

The SBP chief was informed that crude oil import is critical to ensuring the country’s energy security and that if obstacles arise, the country will be forced to import petroleum products. Importing petroleum products, on the other hand, would be more expensive for the country in terms of draining more dollars.

The central bank governor said he would talk to the domestic banks to enhance the credit limits of the oil sector. However, he noted that banks cannot go beyond a certain limit in extending LCs.

The oil sector’s credit limits have shrunk dramatically in the last year as the dollar rate has risen to Rs. 280 from Rs. 178 a year ago, according to the governor. Now the capital requirements for the oil sector cannot be met on the basis of existing credit limits.

The SBP governor was informed of cash flow issues in the oil sector due to the non-recovery of exchange rate adjustments following quarterly petroleum price reviews.

The oil sector stakeholders requested that the central bank chief allow LCs and their settlements from different banks, as there had previously been no restrictions on opening LCs from one bank and their settlements from another.

Since the beginning of the dollar crisis, the LC can only be settled by a bank which according to the oil industry was a big issue. The SBP governor rejected this proposal, claiming that reversing the mechanism would increase currency volatility.

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