Written by Tharushan Fernando
25 Aug, 2016 | 8:50 pm
A report by the Committee on Public Enterprises revealed that Sri Lanka suffered a loss of Rs 10.2 billion due to the Hedging Deal.
In 2008, the Ceylon Petroleum Corporation or the CPC entered into several agreements with banks in order to purchase crude oil at an agreed price due to the increase in global oil prices.
Hedging is referred to as a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices. And thereby if the price increases, the bank must pay the government the difference between the limitation and the market price.
If the price drops beyond the agreed limit, the government must pay the bank the respective difference between the market price and the limitation price.
However, crude oil prices in the global market dropped drastically several months after the agreement was reached.
A Fundamental Rights Petition was filed with the Supreme Court thereafter citing that the Hedging Deal caused losses.
Court which took this petition into consideration, ruled for the agreement to be suspended immediately and use the benefits obtained, to sell a litre of petrol at a price of Rs.100.However, the then executive decided to disregard the court ruling.As the court ruling was disregarded, the then Governor of the Central Bank issued an order to suspend all Hedging-related payments. As a result, several banks sought assistance from the International Court of Arbitration.
On July 11, 2016,Minister Susil Premajayantha stated that the Supreme Court made a ruling and if that ruling was followed this issue could have been evaded. He pointed out that hedging was suspended due to various other reasons but if the agreement was terminated as per the Supreme Court ruling, something better would have happened
According to COPE, the loss suffered by the country simply because of disregarding the court ruling was a staggering Rs.10.2 billion.
COPE also notes that if once adds up the payments made to banks, legal expesens , miscellaneous expenses and future payments, the loss would amount to Rs.15 billion.
COPE had also criticised the lethargic policies followed by the current CPC administration in this regard.
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