Hedge Advice

Image courtesy of Sanjeewa Dayarathne (www.Feedback.lk)

Sept 28, 2006 (LBO) – Sri Lanka should hedge oil prices to mitigate negative effects on the economy, by entering into contracts with foreign banks, the country’s central bank said in a statement. The Central Bank said it had made a presentation in early September to the President and Cabinet of Ministers to explain schemes available in the global market to hedge oil prices.

“Such forward contracts or hedging arrangements would have to be entered into with international banks of high reputation, who have the experience and ability to manage risks of this nature,” the Central Bank’s Economic Research Department said in a statement Thursday.

Crude oil is imported in Sri Lanka by the Ceylon Petroleum Corporation, which is a state-owned enterprise, while a subsidiary of the Indian Oil Corporation which has a third share of the market, only imports refined products.

The Bank said it had made the presentation to the government because, ‘in the view of the Central Bank, it would be imprudent for any organisation or a government not to pursue an insurance scheme such as a hedging mechanism, when dealing with a highly volatile market, which if left unchecked, could result in a hig