Sri Lanka closes oil refinery amid money printing, forex shortages

ECONOMYNEXT – Sri Lanka has closed its sole refinery for 50 days to save foreign exchange for food and medicine Petroleum Minister Udaya Gammanpila said as the country faces severe foreign exchange shortages due to loss of credibility of a US dollar peg due to money printing.

“We decided to shut down the refinery for 50 days,” Gammanpila told reporters Monday. “We made this decision to manage limited foreign exchange to import essential foods.”

Gammanpila said the 51 year old refinery produced a relatively lower yield of distillates petrol and diesel but large volumes of furnace oil and naptha, which is usually used by the power sector.

“About 37 percent of the refined product is furnace oil and naptha,” he said. About 19 percent is jet fuel and kerosene. About 43 percent is petrol and diesel.”

He said heavy rains had pushed up hydro power and power ministry had said they did not need furnace oil. Jet fuel was also needed for long haul flights and short haul flights did not need much fuel from Colombo, he said.

“About 56 percent of the output of our refinery is furnace oil and jet fuel for which there is not much demand.

“So instead of getting crude, the limited foreign exchange will be used to import, petrol, diesel, medicines, gas and other essential goods.

“Our refinery supplies on 14 percent of the petrol demand and Diesel 29 percent of diesel needs,. Importing this requirement also as refined fuel is helping in managing foreign exchange.

“As soon we hope to resume operations as soon as forex crisis is solved. We think maximum 50 days we will have to keep it closed.”

Sri Lanka charges import duty for refined fuel, which is paid by rival Lanka IOC in full but crude imported by CPC is taxed at a lower rate. The tax relief covers the inefficiency of the refinery but the government loses tax revenues.

CPC has in the past also sold furnace oil to the Ceylon Electricity Board at higher than market price.

As news of the refinery closure spread, jittery motorists lined up to top up fuel leading to some fuel stations running dry.

“But this will only affect the Petroleum Corporation. People will not be affected,” Gammanpila said, adding that there will be uninterrupted fuel supply in the country.

The 50,000 barrel-per-day refinery was built in 1969 and used to refine light Iranian crude.

However after US sanctions imposed in 2012 it started to refine Oman light and Murban.

Sri Lanka has been trying to get a 3.6 billion US dollar credit line from Oman and a 500 million dollar credit line from India. However the deals have not been finalized as yet.

Sri Lanka’s foreign exchange reserves have plummeted 60 percent in the first nine months to 2.27 billion US dollars by end October as the central bank exchanged dollar for newly printed money to maintain a pegged exchange rate.

The Central bank has to allow rates to go up so that bond auctions do not fail and private credit slows. After price controls on bonds auctions were lifted, more bonds are being sold to real buyers but interbank forex markets are not working due to lack of credibility at the pegged exchange rate of 203.

Usually a float is required to get interbank markets to work and end a sterilized intervention trap (printing money to maintain a policy rate after intervening to maintain a peg).

The CPC also owes some suppliers who have given oil on credit.

As foreign exchange shortages worsened and there delays in settling letters of credit interest in CPC oil tenders are waning according to industry officials.

Lack of interest in crude tenders could also be contributing to the refinery closure.

“Though Sri Lankans do not know about the gravity of the forex crisis we are facing, the rest of the world knows it very much and that is why there are problems with tenders,” a source from the state-run Ceylon Petroleum Corporation said asking not to be named.

Chairman of Sri Lanka’s power utility MMC Ferdinando was quoted as saying in a state newspaper that two coal tenders were unsuccessful because Sri Lanka was facing a dollar crisis.

“We don’t have enough funds to open LCs,” he said. (Colombo/Nov15/2021)

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