19 February 2012
Sri Lanka is seeking to borrow US$ 1 billion from global investment bank Goldman Sachs to meet soaring fuel costs and fund the poorly performing and publicly owned Ceylon Petroleum Corporation, The Island newspaper reported Monday.
Colombo faces significantly higher fuel costs for two reasons.
Firstly, the majority of its oil supply comes from Iran, soon to be subject to a US and EU punitive sanctions regime over Tehran's nuclear weapons program.
Secondly, Sri Lanka was also recently forced by the IMF to allow its currency to depreciate, leading to an immediate rise in fuel prices.
See our earlier post here.
The CPC's negotiations with the US investment bank has an unfortunate precedent.
In 2007 Sri Lanka signed a hedging contract with several investment banks effectively committing Colombo to buy oil at what turned out to be a fixed high price.
When the price of oil fell, Sri Lanka refused to pay up and the counterparties, Citibank, Deutche Bank and Standard Chartered, were forced to take legal action.
Although the Singapore courts ruled in favour of Sri Lanka, the ruling had a negative impact on foreign business sentiment towards Sri Lanka as investors feared that Colombo would similarly not honour contract.
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