A multi-million US dollar letter of credit (L/C) default by Pakistan State Oil (PSO) has triggered an inter-corporate debt crisis that threatens power shortages in Pakistan.

Fuel stocks at the country's power plants have now fallen to a level that only meets three days' supply of electricity at a time when the government has promised reliable electricity supplies during the holy month of Ramadan.

L/C shortage

In May, PSO defaulted on L/Cs worth around US$430 million, largely because the country's independent power producers (IPPs) owe huge amounts to the state-owned oil supplier.

As a result of the defaults, international banks are now refusing to open L/Cs for oil imports.

Solutions needed

According to an official at the ministry of petroleum and natural resources, around US$665 million is needed to revive L/C flows.

The official said that the ministry of water and power and the finance ministry had been approached to attempt to resolve the crisis.

Debt circle

While PSO's receivables are now estimated to be around $3 billion, that amount would be substantially reduced if the IPPs paid the US$2.5 billion due to their supplier.

The IPPs meanwhile are owed substantial sums of money by Pakistan Electric Power Company.

New mechanisms

For its part, PSO has repeatedly asked the ministry of water and power to set up mechanisms to ensure smooth inter-corporate payments in the power sector.

With aim of reducing power cuts during Ramadan, the government has asked PSO to supply 22,000 tons of oil per day to IPPs against the current provision of 18-20,000 tons of oil per day.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.