ECONOMYNEXT – Shocking details of how state-owned Ceylon Petroleum Corporation, which has no foreign exchange earnings to speak of, ended up with billions of US dollars in debt every time the central bank printed money to create currency shortages have now been revealed.
Sri Lanka has long engaged in a practice of prohibiting the CPC from buying dollars, even though the company collects rupees from the price of oil, every time the central bank prints money and creates monetary pressure. Instead, the company was forced to borrow dollars.
Analysts have dubbed the policy error that results in tens of billions of rupees in losses every time the rupee falls a type of action by Nick Leeson, after a derivatives broker who had an unhedged position.
KDR Olga, Secretary of the Ministry of Energy, has now revealed how the political mistake took place and CPC did not buy oil with rupees despite having rupees in his bank accounts collected from the clients.
The central bank has recently asked the CPC to source the rupees from the customers and pay for the oil instead of taking losses and funding them with bank credit adding to the debt and interest rate pressure in the country .
Practice of anardimuth
“It is not the practice (kra-mer-vey-dher-yer) that has prevailed all this time,” KDR Olga, secretary of the Ministry of Energy, revealed in a talk show hosted by the private channel Hiru Sri Lanka TV.
“For many years (anar-di-muth kar-ler-yer-ker si-tter) that is not what happened. It has now come to a head (hira wellar thi-yenar prush-ner-yer).
“For many years when we (CPC) weren’t in a financial crisis, we were buying oil on credit. We imported oil even with 360 days credit.
Olga said CPC buys oil with 360 day credit, 270 day credit, 180 day credit and 90 day credit.
“It was the time when we had a good track record,” she explained. “The oil was imported on a letter of credit.
“When the letter of credit came due, in order to maintain a stable exchange rate, instead of settling it – even when the CPC had rupees in its accounts – it 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. This turned into a dollar debt of over three billion US dollars.
Olga said the CPC’s debt in rupees was now around 750 billion rupees (US$3.7 billion).
Who is Nick Leeson?
Olga did not say who ordered the CPC, which has no dollar revenue to speak of (except for some aviation oil sales), to import oil on suppliers’ credit or to turn them into debt.
However, analysts have shown that whenever the central bank pursues an inflationary policy (prints money despite a pegged exchange rate) and creates monetary pressure, the CPC’s dollar debt increases.
Analysts have called these unhedged dollar exposures a Nick Leeson-type financial blunder.
The authorities not only indebted the CPC to banks, but the country also borrowed from other countries to buy oil.
Sri Lanka has an outstanding loan from Iran on oil purchased during a currency crisis decades ago.
The state banks either paid for the dollars with their NRFC deposits or had to borrow the dollars from other parties and the CPC with a margin.
The CPC is now considering securing a US$500 million line of credit from India.
When imports are financed by financial account inflows, the external current account deficit widens.
Sri Lanka’s mercantilists then rise up and say there is an external current account deficit or “double deficit” and blame it for the country’s economic woes, critics say.
Nick Leeson Losses
The CPC also makes a huge foreign exchange loss every time the rupee drops.
Economists and analysts have long called for market pricing of oil so that oil utility customers pay the highest price, which will reduce their disposable income for non-oil imports.
Critics have pointed out that in 2018, when then-Finance Minister Mangala Samaraweera priced oil using a price formula, the central bank printed money to target a spread. production and created currency shortages, the CPC was forced to borrow.
However, the practice of borrowing dollars sabotages the whole pricing formula.
During the 2018 currency crisis, the CPC placed the money in state banks through repurchase agreements, which were in turn loaned to other clients who made non-oil imports.
In 2018, the CPC recorded a foreign exchange loss of Rs 80 billion. It must also continue to pay interest on fuel that has been sold for a long time, sometimes at a profit.
Officials said that in 2021, the CCP lost 83 billion rupees. It is not known to what extent this is due to the depreciation of the forex and the interest on the loans of Nick Leeson.
When the Rupee falls in 2022, the CPC will also suffer heavy losses.
The central bank said state banks were under threat from CPC borrowing and asked the CPC to collect rupees from customers and pay the dollars.
Now, suppliers are no longer willing to extend CPC credit, with Sri Lanka’s sovereign credit being downgraded to “CC”.
“Now the suppliers only give us oil if we prepay (kalin mudal gew-woth),” Olga said. “Payment for tomorrow’s ship must be made. For this, the necessary rupees that the CPC has prepared.
However, the cabinet of ministers this week had decided not to raise fuel prices.
If the losses are financed by credit, Sri Lanka’s interest rates will have to rise further.
If money is printed to keep rates low or if state banks borrow from the central bank’s standing liquidity facility to fund the CPC loss, additional exchange rate pressure and reserve losses will occur, bringing Sri Lanka closer to default, analysts warn. (Colombo/February 24, 2022)