Swap outlook, $ 1.5 billion in India credits draw closer after minister’s comments


ECONOMYNEXT – Sri Lanka’s prospects of securing a $ 400 million central bank swap and import credits from India have improved after the island’s petroleum minister announced that a agreement would be signed on a tank farm in India in January.

During a visit by Minister of Finance Basil Rajapaksa to India.

Goodwill gesture

The credits could however be released following a “gesture of goodwill” on the part of Sri Lanka, according to sources familiar with the matter, while India wants to finalize an agreement on 99 tanks at Trincomallee, which had dragged on since 2003. .

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Although the tanks were in the possession of Lanka IOC, a unit of the Indian Oil Corporation, the lease of the land had not been enforced.

Oil Minister Udaya Gammanpila told the Indian Hindu newspaper that a new tank deal would be signed in January.

As a separate terminal company, Trinco Petroleum Terminal Ltd is said to be formed as a joint venture in Trincomallee, according to reports.

The tank farm was donated to IOC in 2003 in an administration headed by ex-Prime Minister Ranil Wickremesinghe.

Not finalized

A later administration headed by the Rajapaksa family had demanded the return of some of the tanks.

Former Oil Minister Kabir Hashim told parliament on November 11 that the tanks were handed over to India following a memorandum of understanding signed by Prime Minister Wickremesighe in 2003 for 35 years.

Under clause 1.2 of the MoU, a lease on the tanks was signed within six months, but this was not done, Hashim said.

He said in a 2005 manifesto that brought President Rajapaksa to power, a promise had been made that the tanks would be taken back. Instead, permission was given to LIOC to set up a lubricants factory.

Kabir challenged Minister Gammanpila to take over the tanks if he could, as no legal lease had been signed. He claimed that the tanks were not promised to be handed over to India under the Indo Lanka Peace Agreement.

A separate exchange of letters between President JR Jayewardene and Prime Minister Rajiv Ghandi mentioned that “the restoration and exploitation works of the Trincomalee oil park will be undertaken as a joint venture between India and Sri Lanka”, he said. declared Hashim.

LIOC refurbished and used around 15 of the tanks built during WWII by the British.

Sri Lanka also later requested a number of tanks for the “exclusive use” of Ceylon Petroleum Corporation and the remainder for “joint development”.

No progress

Although the issue of tanks has featured in bilateral talks, nothing had been finalized for nearly two decades.

“Today, Lanka IOC and Ceylon Petroleum Corporation agreed to jointly develop the upper tank farm at the China Bay facility in Trincomalee on mutually agreed terms,” ​​Prime Minister Narenda Modi said shortly after talks with the Minister. Sri Lankan President Maithripala in March 2015.

“A joint Task Force will be set up soon to define the modalities. India is ready to help Trincomalee become a regional oil hub ”,

Diplomatic analysts say India had grown unhappy with Sri Lanka’s repeated breaking of promises.

Sri Lankan President Maithripala Sirisena canceled a coal-fired power plant in Sampur Trincomallee, pushing up the cost of electricity in the country.

Prime Minister Wickremesinghe, under the same administration, had also concluded another memorandum of understanding to give India a floating LNG terminal and the ill-fated East Terminal which Sri Lanka has also reneged on.

Finally, the Indian group Adani – which was appointed as an investor in the east terminal – was given another terminal to develop.

However, Indian sources said at the time that this was not in line with the government-to-government agreement reached.

Nothing was done on the LNG terminal as well until the CEB launched a competitive bid in 2020. Now the deal is embroiled in controversy after Sri Lanka received an unsolicited bid from it. of an American company, by issuing the tender with the Indian agreement also not leaving. .

Long term

Despite the problems, India had indicated willingness to provide up to $ 1.9 billion in support to Sri Lanka as the country struggled, when Finance Minister Basil Rajapaksa visited India earlier. in December.

India was also willing to be flexible on the exclusive use of certain reservoirs, sources said. Sri Lanka had wanted at least 10 exclusive use tanks earlier.

India had indicated that its relationship with Sri Lanka was not “transactional”, but that a gesture of goodwill must be shown on the part of Sri Lanka, by concluding the agreement on the tank farm.

Prime Minister Ranil Wickremesinghe said in a video statement on December 28 that Sri Lanka should complete the deals with India as quickly as possible and get the credits.

Sri Lanka should also go to the IMF or have an alternative solution, Prime Minister Ranil Wickremesinghe said.

India granted Sri Lanka a $ 400 million central bank swap last year and renewed it once.

To renew it for a third time, Sri Lanka had to conclude a staff level agreement with India.

However, India can still give the exchange after a lapse of several months under its rules, Sri Lanka’s central bank said earlier in the year.

While a trade of US $ 400 million would come in one deal, all import credits would materialize over time.

Meanwhile, the central bank said on December 29 that “foreign currency inflows under several other facilities currently under negotiation are expected to be completed in early January 2022.”

However, analysts say that loans or swaps do not fundamentally solve the balance of payments deficits, which are caused by cash injections made to keep rates below the level required to match domestic savings with credit. domestic and debt repayments.

In the final analysis, any use of credit lines for imports increases the current account deficit and increases external debt (consumer borrowing) without affecting domestic credit.

Any use of a central bank swap puts the central bank in debt and will also increase its quasi-fiscal costs or losses. (Colombo / Dec18 / 2021 – Update II)

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