ECONOMYEXT – Sri Lanka’s power tariff cut was made possible by an appreciating exchange rate and falling interest rates (monetary stability) that cut costs of the Ceylon Electricity Board and reduced coal import prices, Energy Minister Kanchana Wijesekera said.
Sri Lanka slashed electricity prices as much as 33 percent for small users and 21 percent overall, after hiking them in October as losses mounted due to low rainfall.
Minister Wijesekera said the price cut went beyond the increase in October.
“Most people think that the price reduction came only because of hydro-electricity,” Minister Wijesekera told reporters.
“Producing more hydro-electricity was only one factor. The main fact was the gradual emergence of the country from the unstable economic conditions, especially the strengthening of the rupee.
“The rupee was at around 370 to the US dollar, which has come down to 314 to 317 to the US dollar. Yesterday it was reported that it was down to 307.
“The advantage of strengthening the rupee was the main reason we were able to reduce the generation costs.
Falling interest rates also helped reduce costs, he said. Interest rates were 29 percent in late 2022 and throughout 2023 it was over 20 percent, he said.
“The falling interest rate and the strengthening of the rupee were the main factors that helped reduce the price of electricity.”
“The cost of importing coal has fallen due to the strengthening of the rupee.”
The rupee strengthened because it was allowed to do so under current Governor Nandalal Weerasinghe, as deflationary open market operations (selling central bank held securities against liquidity generated from dollar purchases), triggered a balance of payments surplus.
Sri Lanka’s central bank usually depreciates the currency by cutting rates with inflationary open market operations (liquidity injections by outright or short-term purchase of Treasury bills and offsetting dollar sales with more rupee injections) under ‘data driven’ monetary policy.
In 2022 out of the losses of the five largest SOEs including the Central bank of Sri Lanka 1,323 billion rupees, 1,295 billion came from exchange losses or the mis-targeted policy rate (rate cuts).
After cutting rates with liquidity injections, the central bank then goes to the IMF after hiking rates to very high levels to kill domestic private credit and restore the lost confidence in the currency and the country.
However, in the past when deflationary policy was run, the currency was not allowed to appreciate (except after the 2008/9 crisis usually due to real effective exchange rate, another type of data driven policy, ignoring classical economic principles. The REER is now still sharply below 100.
A cut in electricity prices also reduces the costs of exporters.
Currency depreciation by soft-pegged central banks make it almost impossible to run energy utilities in both Pakistan and Sri Lanka and also Bangladesh when the Taka collapses.
In Laos which also follows IMF style statistical monetary policy and steeply depreciates its currency, energy utility losses are a large part of national debt.
Large volumes of debt of both Ceylon Electricity Board and Ceylon Petroleum Corporation have been taken over by the government, after the country was driven to an external sovereign default.
In 2022 most of the losses of state enterprises came due to the central bank. In 2023, most of the profits of the state enterprises also came from the central bank.
Sri Lanka started to experience severe monetary instability from around 1978 after the second amendment to the International Monetary Fund left the country without a credible anchor for monetary policy, dealing a death blow to J R Jayewardene’s open economy, critics say.
Before the IMF’s second amendment Sri Lanka had virtually the same inflation as the US but was hit by forex shortages due to money printed for rural credit and to sterilize interventions.
Global commodity prices including coal, has also come down after the US Fed hike rates and started to withdraw excess liquidity. The Fed suppressed rates with printed money claiming the 2022 inflation came from supply chain bottlenecks (cost-push) disclaiming accountability.
Many central banks in high inflation countries also claim that an indeterminate part of inflation comes from some source other than its operations.
(Colombo/Mar11/2024)