Passing the buck must stop, CB Governor must quit over hedging deal, charges UNP

Hot on the heels of the landmark verdict delivered by the London High Court, the main Opposition UNP yesterday renewed its call for the resignation of Central Bank Governor Nivard Cabraal, who had urged the Ceylon Petroleum Corporation (CPC) to go for a hedging deal.

“The ruling causes a gigantic loss to the State. Instead of blaming the banks for mis-selling or offering wrong advice, responsible people who aggressively pushed CPC to hedge must be held accountable. Central Bank Governor Nivard Cabraal was the key driver of the hedging deal and he can’t wash his hands off it,” UNP MP and Chief Economic Affairs Spokesman Dr. Harsha de Silva alleged yesterday.



He called for Cabraal’s resignation noting that the Governor should take a cue from the recent moves by the IGP over the Katunayake incident and Petroleum Ministry Secretary Titus Jayawardena over the import of inferior quality petrol. Dr. de Silva said that in comparison to these incidents, the fiasco over the hedging deal was colossal.

Among other reasons cited by the UNP MP in calling for Cabraal’s resignation were the alleged unethical investments in banking stocks and other companies by EPF, which propped the Colombo bourse artificially, and now it and other State funds staying away, thereby contributing to the market’s downfall with value of investments lost and championing extravagant spending to bid for and host the 2018 Commonwealth Games.

“These decisions are as bad as advice given on the hedging deal,” alleged Dr. de Silva. He said that since Parliament has full control of public finances, he was raising these issues as an MP and that all MPs in Parliament had the right to call for accountability from those holding public office.

The Central Bank is yet to make a statement on the London High Court ruling, which ordered that CPC pay US$ 162 million due to Standard Chartered Bank along with interest over the hedging transactions.

Though under criticism, Central Bank in late 2008 in a statement clarified its position on the hedging controversy.

It said in order that the CPC would be able to withstand the impending worldwide oil shock and was of the view that it would be useful to introduce hedging techniques within the CPC. In line with such a view and the Central Bank’s role as the economic advisor to the Government, on 6 September 2006, the Central Bank Governor made a presentation that was prepared by the Economic Research Department of the bank to the Cabinet of Ministers on the subject ‘Maintaining Stability in a Volatile Global Oil Market,’ in which the importance of hedging to achieve stability in oil prices was highlighted.

In that presentation, the Central Bank explained to the Cabinet that there were financial instruments to reduce exposure to risk from volatile commodity prices and that in order to do so, the CPC may need to enter into forward agreements for future oil imports with reputed banks or pay a premium so that agreed prices could be held firm. Two possible hedging instruments were also specifically proposed – Crude Oil Cap and Zero-Cost Collar. CPC went for the latter.

Consequent to the presentation, the Cabinet of Ministers decided that a committee comprising officials from the Central Bank, Bank of Ceylon, People’s Bank, Ministry of Finance and Planning, Ministry of Petroleum and Petroleum Resources Development and CPC be appointed to study the subject further, and to present a report to the Cabinet.

This committee duly studied the subject and presented a report to the Secretary to the Ministry of Finance and Planning on 16 November 2006. By early January 2007, since hedging had still not commenced and Sri Lanka’s vulnerability was increasing, the Governor sent a letter to the Chairman of the CPC, urging in the interest of the national economy the taking of the necessary steps to ensure that expenditure on fuel prices would not cause undesirable effects on the macro-economy in 2007.

The Central Bank said such advice to the country’s largest single importer was obviously sensible and timely. Accordingly, it is clear that the advice cannot, in any way, be considered imprudent or irresponsible. In fact, the events of 2007 and 2008 clearly indicate how vital and important this advice had been.

In response, the CPC Chairman on 11 January 2007 assured the Central Bank that the CPC was “in the process of working out necessary details in getting the hedging process expedited as quickly as possible”.

To this letter, the Governor of the Central Bank responded on 16 January 2007 by stating that the Central Bank was pleased that the CPC was “working out the necessary details in relation to implementing the hedging processes as quickly as possible”. This response was made in the context that, at that time in January 2007, it was highly desirable and opportune for Sri Lanka to make use of the depressed prices to commence hedging.

On 13 January 2007, the Minister of Petroleum and Petroleum Resources Development presented a Cabinet Memorandum setting out the recommendations of the study group seeking the approval of the Cabinet. Subsequently, approval was duly granted by the Cabinet for the following actions:

(i) CPC to hedge purchase of petroleum products, both crude oil and refined products in the international market.

 (ii) Use Zero-Cost Collar as the hedging instrument with the upper bound based on market developments.

(iii) Commence hedging with smaller quantities for a shorter period and gradually increase the quantity and the duration.

(iv) Grant authority to the CPC to call for quotations for oil hedging, decide on future prices and purchase hedging instruments from reputed banks.

(v) Grant authority to CPC to change instruments based on the developments in the market.

Once the Cabinet of Ministers approved the concept of hedging and permitted the CPC to commence hedging operations, the role of the Central Bank in this exercise which it initiated as the economic advisor to the Government was completed. Accordingly, the Central Bank was not, and indeed did not need to be, involved in the hedging transactions of the CPC.

In this context, it should also be noted that the Central Bank regularly provides policy advice to the Government and Government institutions by way of observations to Cabinet Memoranda and the 15 September report prior to the announcement of the Budget. Upon the acceptance or otherwise of such policy advice, the responsibility of either implementing or not implementing such proposals lies entirely with the implementing agency.