Basically Its a form of security, or insurance if you may. The government took out security against the prices of oil increasing and opted for a zero collar hedging base (where there is a sort of a ceiling and a floor to the price of oil, with a gap in between). So if the prices of oil increases above the ceiling or the highest set limit the bank doing the hedging would pay the difference to the government. Meaning that the maximum we’d ever essentially have to pay for oil would be that set price ceiling, no matter how high the prices rose.
Now, at the time the government ventured into this deal prices were skyrocketing and there was talk of $200 oil. So no regrets there right? We were all on the fast track saving a lot of money while the banks bore the burden. But the moment the price of oil started falling and kept falling past the price ceiling, the gap in between and the price floor? It became pretty apparent that the government would have to pay a significant premium on a barrel of oil that was going dirt cheap and getting cheaper by the day.
So we shat in our nappies and started beating our feet on the ground kicking up a fuss crying ‘corruption!’ at the top of our lungs. It’s pathetic really. They got themselves a scapegoat, and no matter what I may have said about Fowzie sacking him was not exactly solving the problem. Its just another example of the bullshit the government resorts to, to try and cover its own ass. If the hedging thing was a bad idea in the first place, then the blame should be on everyone involved, Cabraal, the Chairman and the freaking cabinet. Oh yeah, they’ve all forgotten about who actually approved of the whole thing.
This Central Bank press statement sheds some light on how the whole thing started off, as well as some basic information on hedging itself.
Specific figures relating to the whole things are suspiciously unavailable so I don’t know as to the exact date when this was implemented and how much of our import volumes were actually hedged. Also no idea as to the price ceiling or the floor that was taken up (please let me know anywhere where some numbers can be found), and why exactly these buggers didn’t complain about corruption when they were getting cheaper oil when it was trading $150 per barrel.
And in the meanwhile, screw the credit ratings and investor confidence. We can probably win them back with our natural charm and a cup of white tea yeah? Long live the
Banana Democratic Socialist Republic of Sri Lanka.