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Saturday June 15th, 2024

Sri Lanka’s could lose billions through unsolicited New Fortress Energy deal: CEBEU

ECONOMYNEXT – Sri Lanka stands to lose hundreds of millions of dollars through a back-door liquefied natural gas (LNG) deal with a US firm which could be worth up to 6.0 billion US dollars but is coming in as the sale of share of a power plant, engineers of the state power utility have warned.

Energy security would also be undermined as the national grid would be dependent on a single company for the supply of LNG to the entire country and will also block state-run Ceylon Electricity Board from using cheapest energy source based on market prices, the CEB Engineers Union has said.

It is not clear how the unsolicited deal was suddenly struck without open tender for either the sale of a 40 percent Treasury stake in a power plant, LNG procurement for at least five years, or to operate floating liquefied natural gas terminal which is expected to charge fees from the state-run Ceylon Electricity Board.

US-based New Fortress Energy has announced it had struck a deal to supply state-run Ceylon Electricity Board to supply 1.2 million gallons of liquefied natural gas a day through a 310 MW combined cycle power plant and another 700 MW of plants to be built in Kerawalapitiya.

Related US based New Fortress Energy says strikes LNG supply deal with Sri Lanka

“As part of the transaction, New Fortress will have gas supply rights to the Kerawalapitya Power Complex, where 310 MW of power is operational today and an additional 700 MW scheduled to be built, of which 350 MW is scheduled to be operational by 2023,” the firm said.

“New Fortress will initially provide the equivalent of an estimated 1.2 million gallons of LNG (~35,000 MMBtu) per day to the GOSL, with the expectation of significant growth as new power plants become operational.”

The deal is bundled with a 250 million dollar sale of a 40 percent stake in the existing combined cycle plant held by the Finance Ministry, engineers of the Ceylon Electricity Board Engineers Union said.

The latest deal appeared to be an agreement for a term sheet for a final contract, the Union said.

Largest Ever Deal in History?

The complex deal involving committed energy purchase, a terminal and power plant could turn out to be the largest ever contract Sri Lanka had ever struck with a private company, the union said.

The deal for 5 years could be renewed for a further 10 years.

“The actual deal is in the fuel supply contract which can go up to 6,000 million US dollars and commit the CEB to unwanted LNG which may force renewable plants to be shut or pay the US company for unused gas,” CEBEU President Saumya Manawadu told reporters.

The commitment to pay the New Fortress Energy (NFE) for unused LNG comes through a ‘take-or-pay’ (TOP) commitment where the CEB is forced to operate the power plants 70 percent of the time (plant factor) or pay compensation to the company, the union said.

The deal committed Sri Lanka to “very high Take or Pay (TOP) gas volumes than the actual minimum requirement of the country with strict conditions that NFE should be paid irrespective of whether the contracted volumes are consumed or not,” the group said in statement.

A term sheet agreed with the government shows a price formula with a mark-up where the New Fortress Energy will make profits, union said.

New Fortress Energy is expected to also build a floating LNG terminal and charge fees on top of the gas mark-up for the terminal, while committing the country to purchase high volumes of LNG, the union said.

Terminal Deal

The firm had said it will charge 1.45 dollars per one million British thermal units (MMBTU) of LNG but a minimum commitment or capacity charge could push up it up to 5.50 dollars if the committed volumes are not used, the union said, in addition to compensation paid for unused gas.

The Ceylon Electricity Board operates a system where expensive thermal plants are shut when renewable energy, such as hydro output, goes up.

Under the New Fortress deal for “CEB should pay a minimum of 253 million dollars for FSRU separately as the capacity charge in addition to LNG payment,” the union said.

The terminal deal came after the CEB floated a tender to for a build operate own terminal.

CEBEUs Manawadu said the CEB worked with Asian Development Bank experts to formulate the floating terminal requirements and tender.

A related company to NFE had taken the bidding documents and the deal was transacted while the tender was ongoing, undermining the tender.

Serious bidders would be discouraged due to the unsolicited deal, he said.

He said President Gotabaya Rajapaksa was supportive of the tender going through and it was opened and several firms had bid for it.

Under the original plan a private investor would supply the floating terminal and operate it for competitive fee, a pipeline had been tendered by the state-run Ceylon Petroleum Corporation, which it would own at the end of the contract and LNG would be purchased separately.

A part of the LNG would be under long -term contract and the rest topped up through spot market.

The company that will run floating terminal under the CEB’s competitive tender has to pay Sri Lanka’s 24 percent corporate income tax, while the New Fortress is being promised tax free status the union said.

Manawadu said if the NFE deal went though the chance of another competitive floating unit being built was permanently terminated. The CEB was committed to a capacity charge under the unsolicited deal.

Powerful Mess

Once committed to a take-or-pay deal the CEB will lose its independence to operate the cheapest source of power under its least cost operating guide, he said.

CEB now operates or dispatches plants on a merit order based on generating cost while trying to operate cheaper renewable plants as much as possible.

The merit order of thermal plants may change depending on the fuel price.

“When we have committed to a take-or-pay contract we have to buy the LNG and allow hydro plants to spill or pay the cost of the unused LNG,” Manawadu said.

There was also a threat to energy security as the US firm would be the sole supplier of LNG which will make the bulk of the country’s energy through not only the 1,100 MW of Kerawalapitiya plants but the CEB’s own fuel oil plants which were expected to be converted to LNG after the competitive terminal was built he said.

For comparison Sri Lanka 900 Megawatt coal plant complex now produces about a third of the energy requirement.

The Union resisted take-or-pay deals of up to 20 years or more which came as ‘free’ floating terminal units under the last administration, promoted by different coalition partners, he said.

Meanwhile as the Federal Reserves printed money driving the so-called Powell Bubble, weakening the US dollar LNG prices have zoomed.

The Japan Korea Marker (JKM) for LNG has surged.

Coal prices have also been going up but LNG has spiked unusually. (Colombo/Sept24/2021)

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  1. Chandra De Kauwe says:

    Which uneducated, financial unaware, “half-wit” was permitted to negotiate this “one-sided” deal, which benefitted the US outfit, at serious costs to the Sri Lankan authorities and the people? Have ALL the people lost ALL their dignity and were they on drugs, when it was agreed to sign on the “dotted line?” Did it not occur to that brainless person, who was put forward as the expert that he was “out of his depths” and needed to refer the deal to a competent, sound practitioner, who knows what he was doing? Which SL person(S) is benefitting FINANCIALLY from the transaction? Whose bank account in an offshore country is been loaded with the bribe part of the deal? The people of SL have a right to know, the FULL details of such deals, which have a profound effect on the finances of the country, to prevent major fraud that has been going on, in their name, by corrupt officials for too long!! @ 9/4/22!

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  1. Chandra De Kauwe says:

    Which uneducated, financial unaware, “half-wit” was permitted to negotiate this “one-sided” deal, which benefitted the US outfit, at serious costs to the Sri Lankan authorities and the people? Have ALL the people lost ALL their dignity and were they on drugs, when it was agreed to sign on the “dotted line?” Did it not occur to that brainless person, who was put forward as the expert that he was “out of his depths” and needed to refer the deal to a competent, sound practitioner, who knows what he was doing? Which SL person(S) is benefitting FINANCIALLY from the transaction? Whose bank account in an offshore country is been loaded with the bribe part of the deal? The people of SL have a right to know, the FULL details of such deals, which have a profound effect on the finances of the country, to prevent major fraud that has been going on, in their name, by corrupt officials for too long!! @ 9/4/22!

Sri Lanka beats key IMF program targets for March 2024 amid rupee stability

ECONOMYNEXT – Sri Lanka has exceeded key quantitative targets set in an International Monetary Fund program for March 2024, based on preliminary data the Washington based agency said in a report.

The March data are not performance criteria on which reviews are conducted but are indicative targets which shows the progress of the program and are a stepping stone for a September review based on June data.

An indicative target for the primary balance (roughly overall deficit minus interest costs), was assessed at 316 billion rupees more than four times the 70 billion rupee target set in the program.

Primary balance can be a big surplus if the interest bill is high and capital expenditure is cut and is a type of crisis management tool after a central bank triggers a currency crisis by cutting rates with inflationary liquidity tools.

However, Sri Lanka’s Treasury has also kept a lid on most current spending. A state salary hike is however due after the currency collapse made life difficult for everyone.

Meanwhile more taxes have been collected from the people to finance the island’s bloated state.

A 750 billion rupees central government tax revenue floor has been exceeded to reach 837 billion rupees.

Central bank credit to government (outstanding stock) has been reduced to 2,691 billion rupees in March compared to a target of 2,800 billion rupees. In December the CB credit was calculated 2,742 billion rupees.

Net international reserves of the central bank were brought up to a negative 1,268 million US dollars exceeding the target of a negative 2,035 by almost 700 million dollars.

In order to collect foreign reserves, which is a type of appropriation of domestic savings of the people by the central bank (taking in deposits) and exporting it to the US and other countries to finance their deficits or by other agency debt in reserve currencies.

In order to collect such ‘deposits’ the central bank has to prevent them from being invested domestically.

It is achieved with deflationary policy through sell-downs of down its Treasuries holding to domestic banks or others, at a market rate, collecting interest from the government or repayments of re-finance credits, subject to any nominal changes in reserve money at a given exchange rate.

In 2024 the central bank allowed the exchange rate to appreciate, which can also reduce prices of traded goods boost real and nominal savings and make it easier to collect foreign reserves.

When domestic credit is weak it is easier to collect reserves. Reduced domestic credit and collection of reserves, including by private banks which then cannot be invested domestically, can push the external current account into surplus.

The central bank also met a 5 percent 12-month inflation target, with an achievement of 4.3 percent.

Sri Lanka’s economy grew 5.3 percent despite reserve collections, amid the stability provided by the central bank.

There were no central bank purchases of Treasuries from the primary market.

However the central bank injected overnight and term money to banks (not on a net basis) showing how easy it is for a rate-obsessed monetary authority to get around the requirement and create external instability again as soon as private credit recovered.

The central bank also allowed excess liquidity from dollar purchase to remain unsterilized for an extended period under its ad hoc pegging arrangement, getting a short term falls in rates, but triggering pressure on the rupee as a result in May and June.

It is not possible to collect reserves with a free floating exchange rate. (Colombo/June15/2024)

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Sri Lanka GDP grows 5.3-pct in first quarter of 2024 amid monetary stability

ECONOMYNEXT – Sri Lanka’s gross domestic product grew 5.3 percent in the first quarter of 2024 data from the state statistics office showed as the central bank continued to refrain from generating monetary instability.

Instead of printing money to cut rates under ‘flexible inflation targeting’ and printing money to boost growth by taking into account ‘potential output’ as permitted by its new monetary law, the central bank ran deflationary policy and also allowed the rupee to appreciate.

“The Sri Lanka economy experienced a more favorable economic condition[s] in the first quarter 2024, when compared to the first quarter in the year 2023,” the Department of Census and Statistics said.

“The high inflation had prevailed in the first quarter of year 2023, gradually reduced to a lower level by the first quarter of 2024 and this low inflation incentivized the economy by providing inputs at [a] much lower price.

The agriculture sector grew 1.1 percent in the first quarter of 2024, after also growing 1.6 percent last year.

Industry grew 11.8 percent in the first quarter, against a 24.3 percent last year.

The economy grew amid falling prices, the statistics office said in sharp contrast to the Anglophone macroeconomic claim that inflation is needed to boost growth, on which Sri Lanka has 5-7 inflation target has apparently been set.

Related Sri Lanka central bank pushing for high inflation target to boost growth

“Among ‘Industrial activities’, coinciding with the decline in input prices, the ‘Construction industry’ grew by 14.2 percent, parallel to this, the ‘Mining and quarrying’ industry too expanded by 18.3 percent during this quarter,” the Statistics Department said.

Sr Lanka’s services sector grew 2.6 percent, against a decline of 4.6 percent recorded last year.

The International Monetary Fund has also urged the central bank to give priority to stability.

Sri Lanka dropped the stability mandate in the earlier monetary law which was violated after the end of a civil war to push the country into serial currency crises especially after the International Monetary Fund gave technical assistance to calculate potential output.

Related Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena

Sri Lanka survived a 30-year civil war by giving priority to a stability mandate despite shortcomings in its operational framework but defaulted in peacetime amid activist monetary policy which denied monetary stability to the people. (Colombo/June12/2024)

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Sri Lanka’s NPP notes five-point crisis for economic growth sans details

Former JVP MP Sunil Handunneththi

ECONOMYNEXT — The leftist National People’s Power (NPP) has identified five crises that need resolving for Sri Lanka’s economy to progress, much of which emphasise a production economy targeting export growth though sparse on the detail on resource allocation.

NPP spokesman and former parliamentarian Sunil Handunneththi speaking at an event in Mulaitivu on Thursday June 13 said Sri Lanka is grappling with firstly, a collapse of the production economy, second, a budget deficit, third, a balance of payment crisis which has, fourthly, created a debt crisis, and finally, a resultant gap between haves and have-nots.

“We must first understand the crisis. We reocgnise five main crises that have the same impact irrespective of differences between the north and south.

“The first is the collapse of the production economy. We can see this historically. Agriculture that used to be some 30 percent of gross domestic product (GDP) has now fallen to 8 percent. Essential food is imported. We cannot produce the rice needed for the small population here. Things that can be made here are also imported.

“Second is the income crisis. For the people, their expenses are twice their income. The budget deficit is two or three-fold every day. Banks cannot give loans to businesses and industries because the government takes funds to address the budget deficit. The government takes most of the people’s savings for this,” he said.

The balance of payment crisis Sri Lanka is facing the third crisis, according to Handunneththi, which has triggered a debt crisis, in turn leading to a crisis of income disparity among the people.

“Third is the balance of payments crisis. Imports are two or three fold export income. The government has to take 11 to 12 billion US dollars in loans from foreign countries. When GDP is 80 billion US dollars, debt has gone over 100.”

“All this creates a massive gap between haves and have-nots. Without finding solutions to these crisis, there is no point distributing goods,” he said.

Handunnethi’s remarks appear to be departure from the NPP’s anti-corruption rhetoric which had centred its economic development policy agenda primarily on fighting corruption.

‘Fighting corruption’ and ‘recovering stolen assets’ have been popular slogans since the Aragalaya protests in Sri Lanka and the NPP has made it its central theme in its bid for power. The leftist outfit had also adopted a position that’s cautiously critical of the International Monetary Fund (IMF) and the reforms the international lender has prescribed for Sri Lanka in exchange for a 2.9 billion-dollar bailout.

However, NPP leadership had recently acknowledged the need to continue the IMF programme since the agreement has already been signed.

The Marxist-Leninist Janatha Vimukthi Peramuna, which controls the NPP, though it was never in government barring a brief stint in an Sri Lanka Freedom Party (SLFP)-led coalition in the early 2000s, has been instrumental in driving popular support against privatisation.

Three key policy pillars articulated by the JVP from 2001-2004 and embraced by mainstream politician Mahinda Rajapaksa’s administration in 2005 onward have been highlighted by experts.

From 2005, Sri Lanka halted privatisation, started recruiting tens of thousands of unemployed graduates into the public service every year with lifetime pensions, expanding an already bloated public sector and denying any benefit of a peace dividend to the country.

Sri Lanka also abandoned a price formula for fuel that had helped keep the rupee stable and inflation low from 2001 to 2003 even as global commodity prices went up from the ‘mother of all liquidity bubbles’ fired by the Federal Reserve from 2001.

From 2001 to 2003, state workers fell from 1.164 million to 1.043 million. By 2020, the public sector cadre has grown to 1.58 million with another batch of 53,000 unemployed graduates being paid tax money. (Colombo/Jun14/2024)

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