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Saturday May 18th, 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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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 !

Sri Lanka suffers over $138mn foreign outflow from govt bonds in 2024 after rate cuts

ECONOMYNEXT – Foreign investors have dumped 41.6 billion-rupee ($138.6 million) worth of Sri Lanka government securities in the first 20 weeks of 2024, the central bank data showed, after reduction in the key policy interest rates.

The foreign holding in Sri Lanka’s treasury bills and treasury bonds fell to 75.9 billion rupees on the week ended on Friday (17), May 2024, from 117.4 billion rupees on the week ended on December 29.

The central bank rate has reduced the key policy rates by 50 basis points so far in 2024, extending the rates cut by 700 basis points since June last year.

The rupee appreciated 9.1 percent in the first four months, but the gain failed to attract foreign investors amid a dragged debt restructuring negotiation with external private creditors.

Currency dealers said lackluster demand for dollars due to dampened imports with heavy controls, boom in both tourism revenue and remittances have helped to increase the dollar liquidity in the market, leading to the appreciation of the local currency.

The dealers said foreign investors can earn capital gain if they had bought government securities before the appreciation and now the offshore investors might be selling their bonds.

“They are also discouraged by policy rate cut because that will reduce their returns from the rupee bond investments,” a currency dealer said.

The yield in 12-month T-bills has fallen 336 basis points in the first four months of this year, the central bank data showed.

The central bank also reduced the Statutory Reserve Ratio (SRR) of commercial banks by 200 basis points in August last year to boost liquidity in the market with an aim to reduce market interest rates.

Under tough International Monetary Fund (IMF) conditions for its $3 billion loan program, the central bank raised key monetary policy rates in 2022 and last year to bring down inflation which hit over 70 percent in 2022. The inflation has fallen to the lower single digit now.

The rupee has appreciated to around 300 against the US dollar this week from around 330 level early in November. The local currency was at 365 rupees against the US dollar in early 2022. Depreciation causes capital loss for foreign investors. (Colombo/May 18/2024)

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Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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