Iran, SL sign $ 251 m oil-for-tea deal

Plantation Minister Dr. Ramesh Pathirana and Iran Industry, Mines and Trade Deputy Minister Alireza Paymanpak signing the MoU  

Sri Lanka and Iran yesterday signed a Memorandum of Understanding (MoU) to settle $ 251 million worth of credit outstanding with Ceylon Petroleum Corporation (CPC) with supply of tea of equivalent value.

The Plantation Ministry and Iran’s Ministry of Industries, Mines and Trade were the signatories of the MoU. Under the scheme, $ 251 million outstanding from CPC to Iran’s National Iranian Oil Company will be settled via the export of Ceylon Tea to Iran.

The Plantation Ministry said the MoU is a form of mutual commitment in complimenting each other`s duties and function in the Formulation of a Scheme for the Settlement of Sri Lanka’s Oil Outstanding to the Islamic Republic of Iran through the Exportation of Ceylon Tea.

Iran has been among the top 10 importing countries of Ceylon Tea for the past several decades. Ceylon Tea, which had a market share of around 47% in 2016, dropped to around 25% in 2020 due to the economic sanctions resulting in banking restrictions, payment problems and depreciation of Iranian Riyal. From a peak of 38.42 million kg in 2013, tea exports from Sri Lanka to Iran dropped to 14.73 million kg in 2020.  

The Ministry said due to US sanctions imposed on Iran in November 2012 and with the absence of an accepted payment mechanism through the banking system, Sri Lanka tea exporters found it difficult to receive the export proceeds from Iranian buyers, as at present the payments are usually channelled through intermediary countries, and on many occasions export proceeds are received in instalments incurring inordinate delays. The additional US sanctions on Iran are creating further impediments for Sri Lanka to export tea to that destination. 

Since the Iranian authorities have been repeatedly highlighting the importance of the early settlement of the debt, this scheme will enable the Finance Ministry to make the settlement in local currency through trenches of $ 5 million equivalents.    

Under this scheme, Ministry of Finance is expected to release rupees of an equivalent amount of $ 5 million per month (at the exchange rate declared by the Central Bank of Sri Lanka) on the first Monday of each month to Sri Lanka Tea Board (SLTB) in settlement of the outstanding debt arising from oil purchases by CPC until the entire $ 251 million is settled. 

Consequently, SLTB will be settling payments to Sri Lanka tea exporters upon confirmation of tea consignments shipped to Iran by the tea exporters. The Sri Lanka Tea Board will establish a dedicated account to receive funds from the Ministry of Finance and disburse the same to tea exporters. 

The mechanism will be scrutinised through a recognised Audit Firm and the Sri Lanka Tea Board (SLTB) will settle the payments to tea exporters from the funds released and deposited by the Ministry of Finance based on the recommendations of the selected Audit firm. 

The proposed arrangement is envisaged to provide the equivalent of $ 5 million per month to supply Ceylon Tea to Iran without any international money transactions as overseas remittances will not be involved under this scheme.

“Sri Lanka will be in a comfortable position to serve Iranian tea market until the entire $ 251 million is utilised and the debt payment to Iran is settled while reimbursing the Sri Lanka tea exporters in rupees,” the Ministry said.

“This scheme will not violate any UN or US sanctions since tea has been categorised as a food item under humanitarian grounds while none of the blacklisted Iranian Banks will be involved in the equation. 

“Further, the recommended scheme will save Sri Lanka much needed foreign currency since the settlement to Iran would be made in rupees through the sale of Ceylon Tea. Similarly, the proposed sale of tea will not generate foreign currency as the tea exporters in Sri Lanka will be paid in local currency,” the Ministry added. 

State Ministers Kanaka Herath and Tharaka Balasuriya, Iranian Ambassador to Sri Lanka Haseem Azzazade, Secretary to the Ministry of Plantations Ravindra Hewawasam, Secretaries of State Ministries, and Sri Lanka Tea Board Chairman Jayampathi Molligoda also attended the signing ceremony.