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Monday April 15th, 2024

Sri Lanka inks US$251mn tea for oil debt deal with Iran

ECONOMYNEXT – Sri Lanka had inked a deal to set off export of tea to Iran against a legacy oil credit owed by state-run Ceylon Petroleum Corporation to the National Iranian Oil Company, without busting US sanctions, the island’s Ministry of Plantations Industries said.

Sri Lanka was unable to settle the credit after US sanctions barred dealings with Iranian banks.

Each month Sri Lanka’s Treasury will release 5 million dollar equivalent in rupees to the Sri Lanka Tea Board, a state-run industry regulator and promotion office.

The Tea Board will then pay individual exporters in rupee at the central bank exchange rate.

“This scheme will not violate any UN or US sanctions since tea has been categorized as a food item under humanitarian grounds while none of the black listed Iranian Banks will be involved in the equation,” Sri Lanka’s Plantation Ministry said in a statement.

“Since the Iranian authorities have been repeatedly highlighting the importance of the early settlement of the debt, this scheme will enable the Ministry of Finance to make the settlement in local currency through trenches of USD 5 million equivalents.”

The deal will neither bring foreign exchange to the country and non will go out, the ministry said.

Sri Lanka is in the midst of a severe balance of payments crisis after record money printing to keep interest rates down.

Sri Lanka usually gets oil credits from friendly countries whenever the central bank prints money, and forces the state-run CPC to run an unhedged forex position. The oil loans then generate massive losses as the currency collapses.

The credit lines also worsens the ‘current account deficit’ which is then conveniently blamed for currency crises in a Mercantilist knee jerk reactions, analysts have said.

The MoU was signed by Ramesh Pathirana, Minister Plantation of Sri Lanka and Alireza
Paymanpak, Deputy Minister of Industry, Mine and Trade of Islamic Republic of Iran in Colombo on Tuesday, the Plantation Ministry said in a statement.

Sri Lanka had exported 14.5 million US dollars of tea to Iran up to November 2021, up 0.39 percent from a year earlier.

Sri Lanka’s Plantation MInistry said Ceylon Tea export to Iran had dropped from a peak of 38.42 million kilograms in 2013.

“Due to US sanctions imposed on Iran in November 2012 and with the absence of an accepted payment
mechanism through the banking system, Sri Lanka tea exporters found it difficult to receive the export
proceeds from Iranian buyers,” the ministry said.

“As at present the payments are usually channeled through intermediary countries and on many occasions export proceeds are received in installments incurring inordinate delays.”

“The additional US sanctions on Iran are creating further impediments for Sri Lanka to export tea to
that destination.”

Iran has been in discussion with Sri Lankan governments for a barter system – exchanging only goods and services without involving US dollars – to get over the problem of making payment to Iran banks.

The monthly payments from the Treasury will continue until the entire 251 million dollar debt is settled.

“The Sri Lanka Tea Board will establish a dedicated account to receive funds from the Ministry of Finance and disburse the same to tea exporters.” (Colombo/Dec21/2021)

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Iran President to visit Sr Lanka on April 24 anid rising tension, inaugurate Omaoya power project

ECONOMYNEXT – Iranian President Ebrahim Raisi will arrive in Sri Lanka on April 24 on a one-day official visit to inaugurate Tehran-assisted $529 million worth Uma Oya multipurpose development project with 120MW hydro power generation capacity, official sources said.

The announcement on President Raisi’s visit comes two days after Iran launched explosive drones and fired missiles at Israel in its first direct attack on Israeli territory, a retaliatory strike that raised the threat of a wider regional conflict.

“The President is visiting to inaugurate the Omaoya project. He will be on a one-day visit,” an official at Iran embassy in Colombo told EconomyNext.

A Sri Lankan Foreign Ministry official confirmed the move.

This is the first time an Iranian President coming to Sri Lanka Iranian after then President Mahmoud Ahmadinejad’s visit in April 2008.

The Omaoya project was originally scheduled to be completed in 2015, but had been delayed several times due to unexpected issued faced during the project cycle and funding issue after the United States imposed economic sanctions on Iran and economic crisis in Sri Lanka.

The project was started in 2010 and the funding was to be received as loan grant from the Iranian government. However, Iran was able to provide $50 million before the sanctions. Sri Lanka has to bear the cost after the sanctions.

The project includes storing water in two reservoirs with dams before being brought through a 23 km tunnel to two turbines located underground and generating hydro power with a capacity of 120 megawatts and added to the national grid.

After power generation, the water is expected to be brought to three reservoirs while supplying water to 20,000 acres of old and new paddy fields in both the Yala and Maha cultivating seasons.

The Memorandum of Understanding (MOU) for the construction was signed between the two countries in 2007 while Sri Lanka’s Cabinet approved the execution of the contract agreement between the Executing Agency, Sri Lanka’s Ministry of Irrigation and Water Management (MOIWM) of the GOSL and Iran’s FARAB Energy and Water Projects (FC).

When commencing the project on March 15, 2010, the scheduled date of completion of the project was on March 15, 2015. But the schedule completion date was extended to December 31, 2020 due to the unexpected water ingress into the head race tunnel and followed by social impacts.

The trade between the both countries suffered after the US sanctions. However, Sri Lanka inked a deal in December 2021 with Iran to set off export of tea to Iran against a legacy oil credit owed by state-run Ceylon Petroleum Corporation to the National Iranian Oil Company.

Sri Lanka owes $251 million for crude imported before the US imposed sanctions on Iran. (Colombo/April 15/2024)

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Sri Lanka to discuss two contentious points with bondholders: report

ECONOMYNEXT – Sri Lanka and sovereign bondholders are to discuss two matters in the near future which the two sides failed to reach agreement at March talks in London, a media report quoting a top aide to President Wickremesinghe as saying.

Sri Lanka and bondholders had discussed four matters on restructuring international sovereign bonds in late March and agreement had been reached on two, President’s Chief of Staff Sagala Ratnayake was quoted as saying on state-run ITN television.

A restructuring proposal by bondholders was not in line with IMF requirements, and Sri Lanka had sent a counter proposal, he said.

The matters will be discussed at round of talks in the near future.

Sri Lanka was optimistic of reaching an agreement with the bondholders before June, officials have said.

According to matters already in the public domain, sovereign bond holders are keen to get a bond tied to dollar gross domestic product, as they feel IMF growth projections are too low.

In past re-structuring so-called value recovery instruments, a type of warrant, gave their owners extra payments if a country did better than expected and were tied to items like oil prices.

Bondholders had initially proposed bond which would have a lower hair cut initially, and it will have additional hair cuts if growth is low (about 3.1 percent) as projected in an IMF debt sustainability analysis. (Colombo/Apr15/2024)

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BIMSTEC Secretary General visits Sri Lanka, discusses regional cooperation

ECONOMYNEXT – The Secretary General of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), discussed measures to enhance regional cooperation, during his visit to the island last week.

Ambassador Indra Mani Pandey, Secretary General of BIMSTEC visited Sri Lanka from 07 – 12 April 2024, following his assumption of office as Secretary General of BIMSTEC in January this year.

The Secretary General “met with senior officials of relevant Ministries/Agencies to discuss measures to enhance regional cooperation under various BIMSTEC initiatives,” the Foreign Ministry said in a statement.

Several BIMSTEC countries have bilateral trade agreements, such as Sri Lanka and India, Thailand and Myanmar, Sri Lanka and Thailand, but no collective regional agreement to enable intra-regional leverage.

During the visit, Secretary General Pandey held discussions with Ministry of Foreign Affairs officials and paid courtesy calls on the President and the Minister of Foreign Affairs.

Secretary General Pandey participated at an event on “Regional Cooperation through BIMSTEC” organized by the Lakshman Kadirgamar Institute (LKI) on 9 April. (Colombo/April15/2024)

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