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Sunday January 29th, 2023

Sri Lanka bank forced to give loans, privileges for loss-making airline because it was SOE

ECONOMYNEXT- State-run Bank of Ceylon had been forced to give loans to loss-making SriLankan Airlines and extend special privileges when it failed to repay, because it was a state owned enterprise (SOE), a witness told a commission of inquiry.

"If we thought as a commercial bank, if we had given these loans to another company, these would have been lost opportunities to use the funds more effectively,” Bank of Ceylon (BOC) Offshore Banking Division Chief Manager Upul Wijegunawardena said.

"However, since BOC is a state-owned entity and SriLankan is the national carrier, we have to make a consideration.”

He was testifying at a Presidential Commission of Inquiry into irregularities at SriLankan Airlines and Mihin Lanka, a defunct budget carrier.

BOC now has 190 million US dollars of outstanding SriLankan loans, he said.

Wijegunawardena said the Bank Supervision Department of the Central Bank had written to BOC in 2014, requesting it to carefully examine SriLankan’s finances, efficiency and state of operations before issuing loans above limits, even if the airline is a state-owned entity.

BOC has given 12.9 billion rupees in loans to SriLankan since 2014 which have yet to be repaid, he said.

Letters of Comfort the Treasury issued as collateral for the loans had expired in June 2018, with discussions still ongoing to issue new Letters of Comfort, Wijegunawardena said.

"It would take 3 months for loans to fall under NPL (non-performing loans)," he said, when commissioner Wasantha Geeganage, the Director General of the Sri Lanka Accounting and Auditing Standards Monitoring Board, asked if the SriLankan loans had gone bad.

Another 100 million US dollars in loans had also been provided with Letters of Comfort which are still valid, he said.

Most of the loans had been taken for working capital, to cancel leases of Airbus A350 aircraft and to repay fuel bills of the state-run Petroleum Corporation.

Wijegunawardena said that SriLankan has kept repaying interest on the loans, while renewing the principal amount owed.

He said the Treasury requested BOC to fund SriLankan, since it is the national carrier which cannot be closed, and BOC has to oblige, since the state is the sole shareholder.

SriLankan was privatized in the late 1990s but Emirates was driven out during the Rajapaksa regime, and it became a fuly owned loss-making SOE.

"Is this acceptable to the bank, that only interest is being paid without loans being settled? Is this the policy of the bank? Do individuals or other companies get such privileges?” Retired Supreme Court Justice Anil Gunaratne asked.

"No, they don’t," Wijegunawardena said.

In response to another question Gunaratne posed, Wijegunawardena said that he was aware the money being loaned to SriLankan was public money deposited in the bank.

He said the Treasury has requested BOC and People’s Bank to fund SriLankan. But now there were plans to operate under a public-private partnership.

However, the National Agency for Public Private Partnerships headed by Thilan Wijesinghe has not responded to the bank’s requests to submit a report on the progress, he said.

"We have continuously requested for the final report, but we haven’t received it," Wijegunawardena said.

Wijegunawardena said since he took over the position at the offshore unit of Bank of Ceylon, it has sent numerous memos and board papers to the BOC board to recover the SriLankan loans.

"SriLankan Airlines also sends many requests. They want to make the interest payments as a bullet payment with the loan principal,” he said.

"We ignore such requests. We always ask them to pay the interest. We always follow up with the Treasury and lodge claims if the letters of comfort expire and we have always requested for Treasury Guarantees instead of Letters of Comfort.”

He said that the first 5 billion rupees of the unsettled local currency denominated loans had been given in December 2014 based on an understanding that the government would capitalise SriLankan with 125 million US dollars with a priority towards settling BOC loans by March 31, 2015.

However, the government changed in January 2015.

The government only later issued letters of comfort, Wijegunawardena said.

Between 2007 and 2015, a number of loans had been extended to SriLankan without collateral, many of which were later collateralized using shares of the profitable SriLankan Catering Limited, he said.

Most of the debts prior to 2014 had been repaid, either through funds available in the SriLankan current account or through Treasury Bonds issued to SriLankan, he said. (COLOMBO, 24 August, 2018)

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Sri Lanka operators seek higher renewable tariffs, amid exchange rate expectations

ECONOMYNEXT – Sri Lanka’s renewable companies say they need tariff of 40 to 45 rupees a unit to sell power to the Ceylon Electricity Board and the agency owes them tens of billions of rupees for power sold in the past.

The association has strong exchange rate expectations based on the country’s dual anchor conflicting monetary regimes involving flexible inflation targeting with a reserve collecting target.

“In the coming year of course because of the rupee devaluation, I think the solar energy sector might require tariffs closer to RS 40 or RS 45, hydropower will also require tariffs on that scale,” Prabath Wickremasinghe President of the Small hydropower Developers Association told reporters.

“I think right now what they pay us is averaging around RS 15 to RS 20.”

Some of the earlier plants are paid only 9 rupees a unit, he said. The association there is potential to develop around 200 Mega Watts of mini hydros, 700 to 1000MW of ground mounted soar and about 1,000 rooftop solar.

In addition to the rupee collapse, global renewable energy costs are also up, in the wake of higher oil prices in the recent past and energy disruption in Europe.

The US Fed and the ECB have tightened monetary policy and global energy and food commodity price are now easing.

However in a few years the 40 to 45 rupee tariffs will look cheap, Wickremesinghe pointed out, given the country’s monetary policy involving steep depreciation.

From 2012 to 2015 the rupee collapsed from 113 to 131 to the US dollar. From 2015 to 2019 the rupee collapsed from 131 to 182 under flexible inflation targeting cum exchange rate as the first line of defence where the currency is deprecated instead of hiking rates and halting liquidity injections.

From 2020 to 2022 the rupee collapsed from 182 to 360 under output gap targeting (over stimulus) and exchange rate as the first line of defence.

“The tariffs are paid in rupees,” Wickremasinghe said. With the rupee continuing to devalue in other 5 years 40 rupees will look like 20 rupees.”

Sri Lanka has the worst central bank in South Asia after Pakistan. Both central banks started with the rupee at 4.70 to the US dollars, derived from the Reserve Bank of India, which was set up as a private bank like the Bank of England.

India started to run into forex shortages after the RBI was nationalized and interventionist economic bureaucrats started to run the agency. Sri Lanka’s and Pakistan’s central bank were run on discretionary principles by economic bureaucrats from the beginning.

The Central Bank of Sri Lanka was set up with a peg with gold acting as the final restraint on economic bureaucrats, but it started to depreciated steeply from 1980 as the restraint was taken away.

Now under so-called ‘exchange rate as the first line of defence’ whenever the currency comes under pressure due to inflationary policy (liquidity injections to target an artificially low policy rate or Treasuries yields) the currency is depreciated instead of allowing rates to normalize.

Eventually rates also shoot up, as attempts are made to stabilize the currency which collapses from ‘first line of defence’ triggering downgrades along the way.

After the currency collapse, the Ceylon Electricity Board, finances are shattered and it is unable to pay renewable operators.

Unlike the petroleum, which has to stop delivery as it runs out of power, renewable operators continue to deliver as their domestic value added is higher.

However they also have expenses including salaries of staff to pay.

The CEB which is also running higher losses after the central bank printed money and triggered a currency collapse, has not settled renewable producers.

“In the meantime, we have financial issues with the investors and CEB owns more than 45 million rupees in the industry,” Warna Dahanayaka, Secretary of Mini Hydro Association, said at the conference.

“We can’t sustain because we can’t pay the salaries and we can’t sustain also because of the bank loans. Therefore, we are requesting the government to take the appropriate action for this matter.”

Sri Lanka and Pakistan have identical issues in the power sector including large losses, circular debt, subsidies due to depreciating currencies.

In Sri Lanka there is strong support from the economists outside government for inflationary policy and monetary instability.

The country’s exporters, expatriate workers, users of unofficial gross settlement systems, budget deficits and interbank forex dealers in previous crises have been blamed for monetary instability rather than the unworkable impossible trinity regime involving conflicting domestic (inflation target) and external targets (foreign reserves).

The country has no doctrinal foundation in sound money and there is both fear of floating and hard peg phobia among opinion leaders on both sides of the spectrum regardless of whether they are state or private sector like any Latin American country, critics say.

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Sri Lanka top chamber less pessimistic on 2023 GDP contraction

ECONOMYNEXT – Sri Lanka’s top business chamber said it was expecting an economic contraction of up to 2 percent in 2023, which is much lower than projected by international agencies.

“The forecast of 2023 is quite negative in terms of the international forecasters,” Shiran Fernando Chief Economist of Ceylon Chamber of Commerce told a business forum in Colombo.

“Our view is that there will be some level of contraction, may be zero to two percent. But I think as the year progresses in particular the second half, we will see consumption picking up.”

The World Bank is projecting a 4.2 percent contraction in 2023.

In 2022 Sri Lanka’s economy is expected to contract around 8 to 9 percent with gross domestic product shrinking 7.1 percent up to September.

Most businesses have seen a consumption hit, but not as much as indicated, Fernando said.

“Consumption is not falling as much as GDP in sense and we are seeing much more resilient consumer,” he said.

Sri Lanka’s economy usually starts to recover around 15 to 20 months after each currency crisis triggered by the island’s soft-pegged central bank in its oft repeated action of mis-targeting rates through aggressive open market operation or rejecting real bids at Treasuries auctions. (Colombo/Jan28/2023)

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Acuity Knowledge Partners with Sri Lanka office to be bought by Permira

ECONOMYNEXT – Permira, an investment fund with operations in Europe, US and Asia is buying a majority stake in Acuity Knowledge Partners, which has a 500 seat center in Sri Lanka for a undisclosed sum.

Equistone Partners Europe, from which Permira is buying the stake will remain a minority investor, the statement said.

In 2019, Equistone backed a management buyout of Acuity from Moody’s Corporation.

Acuity Knowledge Partners says it serves a global client base of over 500 financial services firms, including banks, asset managers, advisory firms, private equity houses and consultants.

“Despite the current challenges for the financial services sector, we have experienced continued growth and a strong demand for our solutions and services,” Robert King, CEO of Acuity Knowledge Partners, said.

“Given the significant demand within the financial services sector for value-added research and analytics, and the need for operational efficiency, with Permira’s deep experience in tech-enabled services and its global network, I am confident the business will continue to flourish.”

London headquartered Acuity has offices in the UK, USA, India, Sri Lanka, Costa Rica, China and Dubai, UAE.

Equistone was advised on the transaction by Rothschild & Co and DC Advisory, and Latham & Watkins acted as legal counsel. Robert W. Baird Limited served as financial advisers to Permira, and Clifford Chance is acting as legal counsel.

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