ECONOMYNEXT – Sri Lanka’s central bank has written to the Treasury on May 31 advising it to raise oil prices and the Minister of Finance had approve the price hike in writing on June 10, Energy Minister Udaya Gammanpila said told reporters.
“The central bank sent an advisory letter (updadeshathmaker lipiyak) on May 31 to the Secretary Treasury to immediately raise fuel prices,” Minister Gammanpila told reporters, holding up the document, after he was asked to resign by ruling Sri Lanka Podujana Party Secretary.
“Due to the 600 billion rupees in loans to the (Ceylon) Petroleum Corporation there is a risk of the entire banking system getting destabilized (astha-wa-ra-vee) and collapsing (ka-dar-we-tee-may ava-dar-ner-muck).
The CPC itself had about 390 billion rupees in accumulated losses he said.
Sri Lanka has a habit of forcing the CPC to borrow US dollars instead of buyng dollars in the market after money printing by the central bank triggers forex shortages.
It is not clear why this is done, but analysts suspect it is due to a Keynesian mis-understanding of the monetary systems and external payments known as a spurious ‘transfer problem’. (Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT)
In 2018 the CPC was forced to borrow dollars despite market pricing oil through a formula while rupee collected by the utility was kept it repo deals with state banks and loaned to third parties to import non-oil goods. (Nick Leeson-style losses at Sri Lanka’s CPC raise big questions)
Market pricing reduces spending power (or savings which can be loaned as credit) for non-oil consumption and investment, keeping the external sector in balance.
Market pricing energy to match the external sector with the domestic demand and halting the printing money through rate hikes and cutting state spending and raising taxes to match expenditure that cannot be cut, are the typical International Monetary Fund moves to stop currency crises.
Statists, some socialists and Keynesians generally label such moves as ‘austerity’.
Gammpapila rejected a call by Sri Lanka Podujana Party General Secretary Sagara Kariyawasam for him to resign.
He said written instructions were issued by Prime Minister Mahinda Rajapaksa on June 10 to raise fuel prices.
Under the Ceylon Petroleum Corporation Act, Finance Ministry approval was needed to raise oil prices, he said.
A cost of living committee made up of several ministers had decided to raise the prices on June 09 after discussion, he said. (Colombo/June14/2021)