ECONOMYNEXT – Shocking details of how state-run Ceylon Petroleum Corporation, which has no foreign exchange revenues to speak of ended up with billions of US dollars of debt every time the central bank printed money to create forex shortages has now been revealed.

Sri Lanka has been engaging in a long time practice of barring the CPC from buying dollars, even if the firm collected rupees from market-pricing oil, every time the central bank printed money and created currency pressure. Instead, the corporation was forced to borrow dollars.

Analysts have dubbed the policy blunder which leads to tens of billions of rupees in losses every time the rupee falls, a Nick Leeson type of action, named after a derivative dealer who had unhedged position.

K D R Olga, Secretary to the Ministry of Energy has now revealed how the policy blunder took place and CPC did not buy oil with rupees despite having rupees in its bank accounts collected rupees from customers.

To prevent further imbalances from building up in the economy the central bank recently asked the CPC to find the rupees from customers and pay for oil at the same time, instead of running losses and financing them with bank credit adding to debt and interest rate pressure in the country.

Anardimuth Practice

“This is not practice (kra-mer-vey-dher-yer) that prevailed all this time,” K D R Olga, Secretary to the Ministry of Energy revealed in a talk show hosted by Sri Lanka’s privately-run Hiru TV.

“For many, many years (anar-di-muth kar-ler-yer-ker si-tter), that is not what happened. It has now come to a crunch (hira wellar thi-yenar prush-ner-yer).”

“For many years when we (CPC) was not in a financial crisis, we bought oil on a credit basis. We have imported oil even on 360-day credit.”

Olga said the CPC bought oil on 360-day credit, 270-day credit, 180-day and 90-day credit.

“That was the time when we had a good balance sheet,” she explained. “The oil was imported on a letter of credit.

“When the letter of credit fell due, in order to maintain a stable exchange rate, instead of settling it – even when the CPC had rupees in its accounts – that was turned into a dollar debt.

“The two state banks will settle the LC and turn it into a debt of the Ceylon Petroleum Corporation. That has turned into a dollar debt of over three billion US dollars.”

Olga said the CPC debt in rupee terms was now around 750 billion rupees (3.7 billion US dollars).

Who is the Nick Leeson?

Olga did not say who ordered the CPC which has no dollar revenues to speak of (except some aviation oil sales), to either import oil on suppliers credit or turn them into debt.

However analysts have shown that every time the central bank ran inflationary policy (printed money despite having a pegged exchange) and created currency pressure, the CPC dollar debt went up.

Analysts have dubbed these un-hedged dollar exposures a Nick Leeson type of financial blunder.

Authorities have not only indebted the CPC to banks but the country had also borrowed from other nations to buy oil.

Sri Lanka has an outstanding loan from Iran over oil purchased during a currency crisis decades past.

State banks either paid the dollars with their NRFC deposits, or had to borrow the dollars from other parties and the CPC at a margin.

The CPC is now planning to get a 500 million US dollar credit line from India.

When imports are financed by a financial account inflow the external current account deficit widens.

Sri Lanka’s Mercantilists, then jump up and say there is an external current account deficit or a “twin deficit” and blame it for the country’s economic woes, critics say.

Nick Leeson Losses

The CPC also makes a massive forex loss every time the rupee falls.

Economists and analysts have long called for market pricing of oil so that customers of petroleum utilities pay the higher price, which will reduce their disposable incomes to make non-oil imports.

Critics have pointed out that in 2018, when then Finance Minister Mangala Samaraweera market priced oil through a price formula, the central bank printed money to target an output gap and created forex shortages, the CPC was against forced to borrow.

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However the practice of borrowing dollars sabotages the entire price formula.

In the 2018 currency crisis the CPC placed its rupees in state banks via repurchase agreements, which were in turn loaned to other customers who made non-oil imports.

In 2018, the CPC made an 80 billion rupee forex loss. It also has to keep paying interest on fuel which has long been sold, sometimes at a profit.

Officials have said in 2021 the CPC made a loss of 83 billion rupees. How much of this is due to forex depreciation and interest on the Nick Leeson loans is not known.

When the rupee falls in 2022, the CPC will also make large losses.

The central bank has said that state banks are endangered by CPC borrowings and asked the CPC to collect rupees from customers and pay for the dollars.

Now suppliers are no longer willing to give CPC credit, with Sri Lanka’s sovereign credit downgraded to ‘CC’.

“Now suppliers only give oil to us if we pay upfront (kalin mudal gew-woth),” Olga said. “The payment for tomorrows ship has to be made. For that the needed rupees the CPC has prepared.”

However the cabinet of ministers this week had decided not to increase fuel prices.

If the losses are financed by credit, Sri Lanka’s interest rates will have to go up further.

If money is printed to keep rates down or the state-banks borrow from the central bank standing liquidity facility to finance the CPC loss, further foreign exchange pressure and reserve losses will take place, taking Sri Lanka closer to default, analysts warn. (Colombo/Feb24/2022)