The Fate Of A Nation On The Hands Of Gamesters, Or Jesters?

By Ashan Nanayakkara –SEPTEMBER 22, 2021

Ashan Nanayakkara

The present Governor of Central Bank of Sri Lanka (CBSL), Mr. Ajith Nivard Cabraal came to his first round of tenure at the highest bank of Sri Lanka on or about 01st of July, 2006. According to Central Bank Report 2007, in year-2006, Sri Lanka’s economic growth was 6.5%, budget deficit was 8.4, Trade Balance was about -3,371 (Million USD), 1-USD was worth about 100-Rupees. In re some of the standards of life of the people in that time, 41.6% of the people earned less than 200-Rupees a day, only 10 persons out of 1000 had internet and e-mail facilities and price of an unregistered Land Cruiser Prado was about 5-7 Million of Rupees, whereas, now (as at September 2021) unregistered Land Cruiser cost about 30-Miliion of Rupees or above. The aforesaid economic indicators may have exacerbated after 15-years of time and Sri Lanka, by present date, economically, is below than Afghanistan among the South Asian region.

During the years of 2006 (2-years after Tsunami), in addition to Sri Lanka was engulfed with so much of fear and despair brought about by the LTTE who blasted suicide bombs all over the Country, an economic time bomb, called, “Hedging” was introduced by then Governor of Central Bank to our country. To consolidate the market fluctuations in importing of crude oil to Sri Lanka, the newly appointed Governor of Central Bank, in 2007, presented this system. According to Black’s Law dictionary, hedging means, “an investment that takes position in futures or options to market to reduce the impact of changes in interest rates or prices”.

In September 2006, Ajith Nivard Cabraal gave a presentation to the President and the Cabinet, explaining different hedging mechanisms available to mitigate the impact of oil prices. Of course, the writer never doubts that Mr. Cabral may have intended to bring prosperity to this country morphing into such a risky modus operandi which has no much reputation in international trade. But, the question is, was it worth to enter into such mechanism which will solely decide upon a roll of dice.

Notwithstanding the risk factor mentioned above, “the Central Bank took the initiative to facilitate the CPC entering into hedging arrangements for oil imports to mitigate the impact of rising oil prices on the BOP and to reduce volatility in the foreign exchange market. As the oil prices  reached a record high level in 2006, expenditure on oil imports increased by US  dollars  415 million to US dollars 2,070 million. This created excessive volatility in the market, whilst increasing the trade deficit.” page no. 92 of the Annual Report 2006 of CBSL

The then Governor and the Central Bank resorted to the option of ‘zero cost collar’ which is one type of hedging operates in the world. In simple terms, what happens in ‘zero cost collar’ that the trader and the buyer agree to a fixed unit price, which has no huge difference to the actual value of a unit price. When the actual unit price is lower than the hedged price, the trader gets the profit and when the actual unit price is higher than the hedged price, the buyer earns profits. However, this is not always successful story from the buyer’s point of view when the actual unit price of a commodity is consistently dropping down for a long period of time. The effect of such downside of a price would keep the hedged price intact even when the actual price of the market is way below than the agreed hedging price. For instance, a hedging agreement was entered when the actual price of a crude oil barrel was sum of USD 140 and if the hedged price dropped down to USD 120, the buyer will get a profit of USD 20 from each crude oil barrel. Contritely, what if the crude oil barrel goes down to USD 40 and this price lasts for years and years, and still the buyer pays 120 USD for a crude oil barrel? Alas, a dead loss! This is what exactly, happened in the infamous hedging deal entered by Ceylon Petroleum Corporation (CPC) during the time of 2008 which was mainly advocated by then Governor and the Central Bank of Sri Lanka. As the saying goes, one person’s loss is another’s gain but these kinds of market manipulations more often than not would bring repentances to a small economy like Sri Lanka and the adverse effect would last for generations. Wherefore, the laissez-faire economy has become the more fascinated theory among others to this date by the economist. The less the government is involved in the economy, the better off the businesses will be.

Coming back to the failed hedging deal entered by Ceylon Petroleum Corporation (CPC), there are some bind-blowing revelations in the order dated 31-10-2012, given by the International Centre for Settlement of Investment Disputes Washington, D.C. under the case Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02. In this matter, representing Republic of Sri Lanka team of Lawyers had attended and former Attorneys-General, Mr. Mohan Pieris, Mrs. Eva Wanasundera and Mr. Palitha Fernando had led our team.

The Deutsche Bank AG’s case was Sri Lanka acted contrary to the Hedging Agreement dated 8 July 2008, Sri Lanka had violated Articles 2, 3, 4 and 8 of the Treaty between the Federal Republic of Germany and the Democratic Socialist Republic of Sri Lanka concerning the Promotion and Reciprocal Protection of Investments of 7 June 2000. Thus, Deutsche Bank AG sought damages or compensation sum of USD 60,368,993, interest until the date of the Award, and thereafter until the date of payment, an order that the Respondent pay the costs of the arbitration proceedings including the costs of the arbitrators and ICSID, as well as the legal and other expenses incurred by Deutsche Bank including the fees of its legal Counsel, experts and consultants (see: page no. 2 of the Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02). Sri Lankan abled team of Lawyers, having fought a losing battle could not counter the aforesaid reliefs prayed by the Deutsche Bank of Germany. In fairness to the Attorneys who appeared on behalf of Sri Lanka, their Client had done very little good to defend their case and thus it was nothing but flogging the dead horse.

The Tribunal delivering its decision dated 31-10-2021, held in Deutsche Bank’s favour. The Tribunal awarded to the Claimant Deutsche Bank of Germany, inter alia, non-refundable transportation costs for Members of the Tribunal amounting to USD 12,872.91 (USD 8,568.71 and USD 4,304.20) [vide: paragraph no 587 of the order], compensation to Deutsche Bank the sum of USD 60,368,993 plus interest based on a nine months Libor rate as of December 2009 and 1.12% interest rate will run until full payment, USD 7,995.36 as the legal fees and the expenses of the Claimant.

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