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Monday February 6th, 2023

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 to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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Sri Lanka’s Ceylon Tea prices down for second week

ECONOMYNEXT – Sri Lanka’s Ceylon Tea prices fell for the second week at an auction on January 31, with teas from all elevations seeing a decline, data showed.

“In retrospect, the decline in prices would be a price correction owing to the overall product quality and less interest from some key importers due to the arrival of cargo at destinations ahead of schedule,” Forbes and Walker tea brokers said.

The weekly sale average fell from 1475.79 rupees to 1465.40 rupees from a week ago, according to data from Ceylon Tea Brokers.

The tea prices are down for two weeks in a row.

High Growns

The High Grown sale average was down by 20.90 rupees to 1380.23 rupees, Ceylon Tea Brokers said.

High grown BOP and BOPF was down about 100 rupees.

“Ex-Estate offerings which totalled 0.75 M/Kg saw a slight decline in quality over the previous week” Forbes and Walker said.

OP/OPA’s in general were steady to marginally down.

Low Growns

In Low Grown Teas, FBOP 1 was down by 100 rupees and FBOP was down by 50 rupees while PEK was up by 150 rupees.

The Low Growns sale average was down by 8.55 rupees to 1547.93 rupees.

A few select Best BOP1s along with Below Best varieties maintained.

OP1                     Select Best OP1’s were steady, whilst improved/clean Below Best varieties maintained.   Others and poorer sorts were easier.

PEKOE                 Well- made PEK/PEK1s in general were steady, whilst others and poorer sorts were down.

Leafy and Semi Leafy catalogues met with fair demand,” Forbes and Walker brokers said.

“However, the Small Leaf and Premium catalogues continued to decline.

“Shippers to Iran were very selective, whilst shippers to Türkiye and Russia were fairly active.”

This week  2.2 million Kilograms of Low Growns were sold.

Medium Growns

Medium Grown BOP and BOPF fell by around 100 rupees

The Medium Growns sale average was down by 33.40 rupees to 1199.4 rupees.

“Medium CTC teas in the higher price bracket witnessed a similar trend, whilst teas at the lower end were somewhat maintained subject to quality,” Forbes and Walker brokers said.

“Improved activity from the local trade and perhaps South Africa helped to stabilize prices to some extent.”

OP/OPA grades were steady while PEKOE/PEKOE1 were firm, while some gained 50-100 rupees at times.

Well-made FBOP/FBOPF1’s were down by 50-100 rupees per kg and more at times.

(Colombo/Feb 5/2023)

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