ECONOMYNEXT – Sri Lanka’s Laugfs Gas Plc, a the island’s second cooking gas distributor has reported negative equity in the June 2021 quarter after the Consumer Affairs Authority, a state agency that creates shortages and black markets with price controls, blocked formula based pricing.
Laugfs Gas reported losses of 901 million rupees in the June 2021 quarter on top of 954 million rupees in the March quarter, wiping out its equity in the process.
In the June quarter net assets were a negative 226 million rupees.
Laugfs has been requesting price hikes since the beginning of the year as global energy commodities went up with the US printing money and the rupee also depreciated with the central bank printing money to keep interest rates down under ‘Modern Monetary Theory’.
The CAA last week allowed an increase, below the level the firm asked.
Sri Lanka had a court ordered price formula until 2015.
When global oil prices collapsed from mid 2014 under quantity tightening by then Fed chief Janet Yellen, the administration ordered price cuts beyond the formula but did not allow price hikes when prices picked up forcing the firm to run losses to follow government policy.
When the last administration mis-used the CAA to impose price controls, Razeen Sally, a classical economist said called it the supreme idiocy.
“There has been the supreme idiocy of imposing price controls, which I thought was something we had left behind in 1977,” Sally, Chairman of Sri Lanka’s Institute of Policy Studies said in 2016.
“The government by creating inflation and by having import protection puts burdens on consumers and then puts burdens on producers and entrepreneurs with price controls.”
The import controls during the ‘Yahalapanaya’ administration came from the central bank targeting a call money rate with excess liqudity.
A government intervention which worsens policy uncertainty and effectively expropriates private property is called ‘regime uncertainty’ by classical economists.
Sri Lanka battered by unceasing ‘regime uncertainty: Bellwether
A formula was later worked out.
However in 2020 again price hikes were denied as the new administration also made the firm run losses in off-budget subsidies.
Laugfs had incurred debt to build infrastructure and also distributes gas in Bangladesh, where prices are set every month.
Laugfs Gas finally halted distribution due to the CAA price control, causing shortages.
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State interventions and price controls became widespread in Europe in the last century as ‘planners’ got into the driving seat, which are now copied in developing countries, creating economic upheavals as bureaucrats used the coercive power of the state against citizens and firms.
“It is true that the officeholders are no longer the servants of the citizenry but irresponsible and arbitrary masters and tyrants,” Economist and philosopher Ludwig von Mises wrote in 1944 after watching increased state intervention particularly in countries like Germany.
“But this is not the fault of bureaucracy. It is the outcome of the new system of government which restricts the individual’s freedom to manage his own affairs and assigns more and more tasks to the government.
“The culprit is not the bureaucrat but the political system. And the sovereign people are still free to discard this system.
“It is further true that bureaucracy is imbued with an implacable hatred of private business and free enterprise.
“But the supporters of the system consider precisely this the most laudable feature of their attitude. Far from being ashamed of their anti-business policies, they are proud of them.” (Colombo/Aug16/2021)