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Monday June 3rd, 2024

Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt

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.

Related

Nick Leeson-style losses at Sri Lanka’s CPC raise big questions: Bellwether

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)

Comments (3)

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  1. KUMARA HERATH says:

    MEASURES TO OVERCOME?

  2. marka says:

    so US$ debt created without US$ inflows. either these guys had their brains placed somewhere underneath or was it a deliberate game. Make your guess !

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Comments (3)

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Your email address will not be published. Required fields are marked *

  1. KUMARA HERATH says:

    MEASURES TO OVERCOME?

  2. marka says:

    so US$ debt created without US$ inflows. either these guys had their brains placed somewhere underneath or was it a deliberate game. Make your guess !

Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Sri Lanka Navy assisting in rescue operations (Pic courtesy SL Navy)

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

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UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

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300 of 100,000 trees in Colombo considered high risk: state minister

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)

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