Indo-Lanka trade relations slip on oily issues

June 11, 2006 (LBO) – Two kinds of oil. One fires up vehicles, the other adds flavour to cooking.

The two have managed to create a nasty oil spill between Sri Lanka and India, with trade relations between both countries simmering to boiling point.

The spat between Colombo and Indian Oil Corp’s local unit over 76 million dollars (7.6 billion rupees) worth of unpaid bills dragged on for over a year, which pushed Lanka IOC towards a brink of bankruptcy and allowed their pumps to run dry.

Both sides came to a settlement last Friday with Lanka IOC being paid a billion rupees and up to 5-billion rupees in 2-year treasury bonds priced at 11 percent. While LIOC has to absorb the balance losses, Colombo has allowed them to fix retail prices at the 160 sheds they own islandwide from next month.

Away from the center stage another controversial drama – Sri Lanka’s growing shipments of vanaspati oil to India – has earned nasty reviews with New Delhi taking the unusual step of limiting imports last week, despite a free trade pact between both nations.

A man shows off content in a popular vanaspati brand
(AFP/Lakruwan Wanniarachchi)

Vanaspati, a hydrogenated vegetable oil similar to ghee, is a cheaper form of butter fat that was developed in India in the 1930s to use for cooking purposes.

This grain-like substance, which looks a bit like an off-white facial scrub, is made out palm oil extracts and is sometimes substituted by a similar product called ‘bakery shortening’ that is used in the confectionery industry.

“While trade between both countries have gone up, there are some bad experiences for Indian companies here like Lanka IOC, then there is the vanaspati issue, which has destabilised domestic industries in India with imports flooding from Sri Lanka,” Indian High Commission’s First Secretary (Commercial & Economics), Sunjay Sudhir told businessmen at a seminar late May.

“Sounds of such news (LIOC) going back to India are scaring other investors,” says Sudhir.

Despite a free trade pact, Sri Lanka had voluntarily capped exports at 250,000 metric tonnes and restricted the quota to 10 factories.

Sudhir says India wants Sri Lanka to cap her vanaspati and bakery shortening exports to 100,000 metric tones.

While Sri Lanka was not keen to toe the line, India’s sudden import restrictions last week, forced all vanaspati factories – ironically largely Indian owned – to stop production.

A motor cyclist is turned away from a Lanka IOC fuel station. Petrol
pump stations ran dry following a payments dispute between LIOC and the
Sri Lankan government. (AFP/ Sanka Vidanagama)

“It has been decided by all ten units to stop all exports and production with immediate effect until the government of India removes the imposed notification,” the Vanaspati Manufacturers Association of Sri Lanka informed Colombo on June 4.

Sri Lanka will voice her concerns through its High Commission in New Delhi on the vanaspati issue, Nimal Karunatilake, Deputy Director of Commerce said adding that oily rows are also expected to feature at secretary-level talks under the Comprehensive Economic Partnership Agreement (CEPA), scheduled for June 26 to June in Colombo.

On the LIOC front, it remains to be seen how the government tackles the problem of pricing retail fuels.

“The treasury has said they won’t subsidise retail fuel prices anymore, but we are still a state corporation and need government consent to align retail prices with global crude prices,” says CPC chief Jaliya Medagama, which controls nearly 70 percent of the local market.

CPC Saturday raised retail prices by 5-percent, far below 13.6 percent increase they sought, Medagama said.

“It will be interesting to see how LIOC prices their products from next month,” muses Medagama, “LIOC will not be competitive if they sell at prices above Ceypetco.”

Despite all these misgivings India is currently Sri Lanka’s third largest export market, with around two billion dollars in bilateral trade, with a trade balance tipped in India’s favour.

India is also the island’s second largest investor, with investments of over 500 million dollars in the island.

(US$ 1 = LKR 103)