By 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.
This could go to the anal of history as the biggest arbitral award passed against the Republic of Sri Lanka by a private bank. It is alleged that, Sri Lanka lost nearly USD 200 for the entire litigation inclusive paying of damages and its interests.
In this backdrop, the writer would like to re-produce some pleadings and findings of the tribunal in the aforesaid Arbitration action which have directly accused that Ajith Nivard Cabraal and the Central Bank who were instrumental in this hedging deal.
“…In early September 2006, A. N. Cabraal, Governor of the Central Bank, gave a presentation to the President of Sri Lanka and the Cabinet of Ministers, explaining different hedging mechanisms available to mitigate the impact of high oil prices…” (vide: para 18 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)
“…As stated above, in late July / early August 2006, the Central Bank invited Deutsche Bank and other banks to make presentations on hedging and later called for quotes from the banks directly.97 The Central Bank was the driving force behind the hedging program, promoting it to the public, the Cabinet and the President…” (vide: para 178 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)
“…Mr. de Mel testified at the hearing that the “decision to enter into hedging arrangements based on the zero-cost collar mechanism was a decision of the Cabinet of Ministers based on the recommendations of the Central Bank and a specially appointed study group…” (vide: para 363 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)
This above paragraphs show that Ajith Nivard Cabraal is the protagonist who brought this hedging deal to Sri Lanka.
“…Claimant submits that at the time of the investigation, the Central Bank and Governor Cabraal were forced to defend their role in relation to the hedging program amid substantial public criticism. 303 They openly used the investigation of the banks to deflect such criticism. By placing the blame on the banks and excluding further payment by CPC, the Central Bank and its Governor managed to exculpate themselves and have largely avoided further public criticism…” (vide: para 436 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02) This is a proof that how hard the Governor Cabraal strived to stifle his involvement to the colossal loss incurred through his the unsuccessful deal, when public wrath was turned towards him.
“…Finally, Deutsche Bank also points out that Governor Cabraal, who had been a central figure in relation to almost every aspect of the case and was involved from the very start in August 2006, has not given evidence to the Tribunal, despite confirmation that he is in good health, working full time and making regular visits to Singapore…”(vide: para 445 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)
“…The Arbitral Tribunal considers, on the basis of the evidence, that Sri Lanka has breached the fair and equitable treatment principle through the actions of the Supreme Court and the Central Bank, including its Governor…”…”(vide: para 474 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)
Without prejudice to the rights of the officers of the Central Bank and Mr. Ajith Nivard Cabraal who handled the aforesaid catastrophic economic operation, it must be noted that one cannot discredit the above findings. Once this failed economic decision came to light, as per the conclusions made by the tribunal, Mr. Cabral, for his own defense, tried his level best to exculpate himself by holding an investigation within the Central Bank itself. This sham investigation was found to be as “resorting to strong arm tactics” by the Tribunal, through the email correspondences shared among the officers of the Central Bank. In addition to the aforesaid fake probe, the Governor had tried to mitigate the losses by stopping payment to Deutsche Bank on or about 16-12-2008. Finally, the Governor had gone to the extent of making highly critical public statements regarding Deutsche bank with unfounded and injurious to that banks’ reputation. None of these arm twisting tactics played by Cabral delivered results, and ultimately, Singapore based Arbitration Centre held against us. So, Sri Lanka had to pay top dollar to German Deutsche Bank. It is ironical that the person who has advocated the pros of hedging to the President and the Cabinet, who was healthy enough to appear before the Tribunal and in fact gone to Singapore several times during the sessions of the Tribunal were underway, Cabraal had not even given evidence on behalf of Sri Lanka, the Tribunal found. That is the level of the accountability of then Governor of Central Bank of Sri Lanka.
Simultaneously, there were 2-cases, bearing nos. S.C. (FR) 535/2008 and S.C. (FR) 536/2008 were filed at the Supreme Court of the Democratic Socialist Republic of Sri Lanka against the Minister of Petroleum – A. H. M. Fowzi and Chairman of Ceylon Petroleum Corporation, Asantha de Mel and et al for the purpose of prevent this erroneous financial deal. An interim order was given in the aforesaid 2-cases by then Chief Justice – Hon. Sarath N. Silva on 28-11-2008. This interim order was also tried to use as one of the trump cards from our side of the case at the tribunal. Unfortunately, the aforesaid Chief Justice who had lot of political ambitions after his retirement, had made it public that, the latter delivered that order not based on the Hedging Agreement per se but on a political ground. This was used against Sri Lanka by the Deutsche bank and hence the tribunal determined that, “…The Tribunal also relies on the public statements made subsequently by Chief Justice Silva who presided over the hearing. In those public statements the Chief Justice confirmed that the decision was issued for political reasons. He indeed declared that “the Government was forced to comply with the hedging agreements. We will stop that on a judicial order, just pass on to benefit to the people. The Government said you stop the hedging agreements we won’t pass on the benefit The Chief Justice further recognized that internationally, Sri Lanka had no defence to present in the arbitration proceedings, that it was a difficult fight…(vide: para 479 of Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka ICSD Case No. ARB/09/02)” Therefore, the Sri Lankan legal point of, ‘inasmuch as our apex courts had prevented the hedging deal and thus we are not bound by that Agreement’, had gone down the drain and decided that has no merit before the international tribunal.
When the Central Bank of Sri Lanka and its Governor – Mr. Ajith Nivard Cabraal entered into this hedging deal, they were fully aware that in the event of a fall of oil prices, Sri Lanka would be required to make additional payments; this is the cost of hedging. Knowing the same, Cabraal and the clan carried on. The weed of crime bears bitter fruit, in the same way, sooner or later, they faced to a mammoth lose which was destined. The Governor should have known that he could not hit the jackpot ever. A person in such a capacity must foresee at what moment he must leave the casino table. It is no use keep on doing hedging ad infinitum until we bet the farm. Regrettably, kinds of persons who spent about USD 6.6-Million to buy Greek bonds just before Greece declared its Bankruptcy, cannot fall on to that erudite class of John Exter (who was the first Governor of Central Bank of Sri Lanka and also the brain child behind the finding the Central Bank in Ceylon in 1950) and thus entire nation paid the price. Mockery is those who are not aware of this rudimentary principles of economics and those who had spent a fortune out of public money, are, today, crowned for the same positions again. If Sri Lanka do not learn her lessons, let writer to say that, similarly, notorious Arjuna Mahandran too will be a better candidate as the next Governor of Central Bank of Sri Lanka!