Sri Lanka CPC racks up Rs250bn plus loss in three weeks as rupee falls | Sinhala News

Sri lanka News – Sri Lanka’s state-run Ceylon Petroleum Corporation which has been forced to borrow dollars by authorities whenever money is printed to create forex shortages has lost at least 250 billion rupees over three weeks as the rupee fell, based on available data.

The CPC had taken dollar debt and suppliers’ credit totaling 3,356 million dollars sacked Petroleum Minister Udaya Gammanpila told parliament in January.

The CPC had repaid 611 million worth of debt but banks had been unable to buy dollars due to forex shortages, he said.

As a result by the last week of January the CPC owed state banks a minimum of 2.745 billion US dollars.

The CPC is made to borrow dollars by authorities due to A widespread Mercantilist belief held in the island that balance of payments troubles are caused not by central bank liquidity injections in a pegged regime, but due to imports – mainly oil – and a current account deficit.

The CPC has no rupee revenues but authorities usually blocked the agency from buying dollars in the open market as liquidity injections hit made to keep policy rate, hits the island’s non-credible reserve collecting peg now called a ‘flexible exchange rate’.

A flexible exchange rate is neither a free floating regime with an inflation target (domestic anchor) nor a consistent peg at a fixed rate (external anchor).

The peg was allowed to fall on March 08, after two years of monetary printing depleted foreign reserves.

By March29, the indicative spot dollar rate had weakened to 294.98 rupees.

Based on the rate, the CPC now had unrealized loss of at least 259 billion rupees, based on a 2.74 billion dollar debt.

If the state banks were unable to buy dollars with the rupee paid, the bank or banks concerned would have a 611 million dollar negative net open position.

Unlike loans taken for capital expansion, such as a pipeline which would bring future revenues and could potentially be repaid with higher rupee revenues, the dollar debt have been mostly used for consumption and to fund losses of goods already sold.

The CPC is made to borrow every year the central bank follows inflationary policy. The loans are repaid when deflationary policy is followed and reserves are re-built when domestic credits falls.

In the same manner as the CPC, the central government also borrowed through International Sovereign Bonds to repay maturing debt instead as money was printed, instead of squeezing the current account, analysts have shown.

Suppliers’ credits are usually used by state economists to fund losses and off-budget subsidies.

They then complain that there is an external current account deficit.

But in 2018, the then Finance Minister Mangala Samaraweera market priced fuel amid heavy opposition from the then opposition Sri Lanka Padujana Party but the central bank leadership printed money as domestic credit recovered and busted the rupee from 151 to 182 to the US dollar.

The CPC then kept its rupee revenues in repo transactions, allowing the money in state banks to be loaned out and bring more imports, completely sabotaging the price hikes which were supposed to reduce disposable income of fuel users and reduce non-oil imports.

However in Sri Lanka usually politicians are blamed for the country’s economic ills. When money is printed and inflation rises, people also demand subsidies.

With the rupee falling, calls are intensifying to set up a currency board or a credible peg where state economists will no longer be able to print money, trigger external collapses and foment social unrest. (Colombo/Mar30/2022)

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