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Sunday May 22nd, 2022

Sri Lanka trying to re-finance billion dollar CPC ‘Nick Leeson’ loan from state banks: report

ECONOMYNEXT – Sri Lanka is trying to re-finance billion US dollars out of more than two billion US dollars of unhedged forex loans taken by Ceylon Petroleum Corporation from state banks, which are causing massive losses as the currency weakens, a media report said.

Sri Lanka’s The Sunday Times newspaper quoted Energy Ministry Secretary K D R Olga as saying that CPC owed 2.081 billion US dollars to state-run Bank of Ceylon and People’s Bank.

The Sunday Times report said the government had set up a committee made up of Deputy Treasury Secretary Saman Fernando, CPC Managing Director Buddiha Ruwan Madihahewa to evaluate unsolicited bids from private international lenders to give a loan to the CPC.

The report quoted Olga as saying that the cabinet approval had been granted to evaluate the unsolicited proposals since calling for expressions of interest may create adverse impact.

The People’s Bank and Bank of Ceylon are charging 5.5 percent interest on the loans.

The government hoped to get a loan at below 3 percent with 10 year repayment and less than 3 percent interest, she was quoted as sayig.

A sovereign guarantee of for a billion US dollars would be given for the loan, using guarantees already issued to Bank of Ceylon and People’s Bank loans which are to be settled, she said.

Sri Lanka’s Keynesian policy makers have made the CPC borrow dollars from state banks to pay import bills instead of buying dollars from the forex market whenever the central bank printed money and created forex shortages, analysts have said.

In 2019, the CPC borrowed around 900 million US dollars taking the total loans under Treasury guarantees to 1.8 billion US dollars despite market pricing oil, as money was printed to target a call money rate and close an ‘output gap’.

CPC borrowed dollars despite having cash balances at state-run banks from crowding out consumption from market pricing oil under a price formula, effectively sabotaging the benefit of a price formula, as the cash was loaned to other borrowers to generate demand.

Analysts have likened the unhedged dollar borrowings of a utility which sells in rupees to a ‘Nick Leeson’ strategy.

Analysts believe that CPC is made to borrow dollars despite having a price formula due to a Keynesian belief system around what is known as ‘transfer problem’ where the link between domestic credit and international payments are mis-understood.


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

Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT

In a 1929 debate classical economists including Swedish Nobelist Bertil Ohlin and French economist Jacques Reuff who late saved the French France tried convince John Maynard Keynes that Weimar Republics inability repay foreign dues came from to money printing and not a ‘transfer problem’

In 2018, the CPC ran a 104 billion rupee loss as the rupee was busted from 153 to 182 to the US dollar, making the utility run a 80 billion rupees forex loss.

The CPC’s total debt as of now amounts to 635 billion or 3355 million US dollars, the Sunday Times said.

Peoples’ Bank was owed 1,075 million and Bank of Ceylo 1,006 million dollars.

Oil suppliers have to be paid 597 million US dollars through Letters of Credit issued by the People’s Bank and 677 million dollars though LCs issued by the Bank of Ceylon, or a total of 1,74 million dollars the report said.

Bank loans and suppliers credit totalled 3,355 million US dollars or 635 billion rupees.

Two state agencies and Independent Power Producers (IPPs) also owed the CPC 151 billion rupees. (Colombo/June20/2021)

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