Pakistan plans to utilise letters of credit (L/Cs) in long-term measures to prevent the re-occurrence of the inter-corporate circular debt that is currently choking energy sector financial flows.

To solve the problem in the short-term, the government is to issue up to 300 billion Pakistani rupees (Rs300 billion) worth of bonds to clear up the current financial mess.

L/C requirements

Under the government's proposed plan, oil marketing companies will be required to buy petroleum from refineries using L/Cs.

This would provide a solid guarantee on all outstanding receivables.

Time limit

The L/Cs would also be limited to the length of time it takes to deliver the petroleum.

Similarly, power companies would also have to use L/Cs when purchasing from oil marketing companies.

Outstanding receivables

Problems in the energy sector often centre on Pakistan State Oil (PSO), the country's largest oil supplier.

It is routinely owed so much money by its customer that, periodically, it cannot meet its payment obligations and has to cancel orders for more fuel.

According to latest estimates, it has outstanding receivables of around Rs155 billion.

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