Sri Lanka will use tea to pay off its $251 million oil debt to Iran

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Sri Lanka will use tea to pay off its $251 million oil debt to Iran
Tamil women pick tea leaves in the highlands of Nuwara Eliya, Sri Lanka.Getty Images
  • Sri Lanka reached an agreement to send tea to Iran to settle a $251 million oil debt, according to reports.
  • Sri Lanka wasn't able to pay the debt via other means as US sanctions prohibit dealings with Iranian banks.
  • But Sri Lanka said its tea-barter plan does not violate UN or US sanctions against Iran.
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Sri Lanka will send tea to Iran to clear its debt for past oil imports, with the south Asian country turning to the commodity as a payment method in the face of shrinking foreign reserves and sanctions on Iran, according to news reports Wednesday.

Representatives from the two countries on Tuesday signed a memorandum of understanding that stipulates Sri Lanka will settle $251 million in oil import dues to Iran by bartering tea, the Tehran Times reported, citing Iran's Trade Promotion Organization.

Sri Lanka plans to send $5 million worth of tea to Iran each month until the debt is settled, said Ramesh Pathirana, head of Sri Lanka's plantation ministry, according to a BBC News report.

State-run Ceylon Petroleum Corp. has a $250.9 million debt to the National Iranian Oil Co. Sri Lanka wasn't able to settle the debt through other means as US sanctions prohibit dealings with Iranian banks, but the country said the new arrangement will not violate US or UN sanctions,

Tea "has been categorized as a food item under humanitarian grounds while none of the black-listed Iranian Banks will be involved in the equation," said Pathirana, according to the news site EconomyNext.

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The barter agreement also comes as Sri Lanka is undergoing severe financial stress. It's facing a fall in foreign-exchange reserves against high external debt payments and limited financing inflows, Fitch Ratings said last week in downgrading Sri Lanka's sovereign rating to CC from CCC. The downgrade reflects Fitch's view that Sri Lanka, which is among the world's top tea producers, has an increased probability of a default event in the coming months.

The country's foreign exchange reserves have dropped by roughly $2 billion since August, to $1.6 billion at end of November, or the equivalent to less than one month of current external payments, said Fitch. The ratings group said Sri Lanka faces foreign-currency debt service payments of $6.9 billion in 2022.

The country's external finances are also challenged in part by a slide in remittances and the blow dealt by the coronavirus pandemic to the economy, as tourism is a key driver, said Fitch.

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