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Wednesday October 5th, 2022

Sri Lanka CPC seeks fuel price hike amid Powell Bubble, currency fall

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation is losing money as global energy prices go up, despite an earlier increase in prices, officials said as the rupee also fell amid money printing.

CPC last raised prices in June 11.

“At that time the price in the international market of a 92 Octane Petrol barrel was 78.80 US dollars,” Chairman Sumith Abeysinghe said.

“Diesel was 76.7 US dollars. By now the price of Petrol has increased to 92 dollars while Diesel has increased to 92.67 dollar.

“By August CPC has made a loss of 70 billion rupees. The only thing we can do is increase prices.”

The government also charges taxes from Petrol and Diesel. Unlike renewable energy where government gives subsidies in some cases at the expense of the budget deficit, Petrol and Diesel are a source of taxation.

“With this increase, currently CPC has loss of 14.56-rupee loss per litre on petrol,” Abeysinghe said. “And the loss of diesel has increased to 31.46 rupees per litre.”

“Up to August CPC has also 70 billion rupees. The main thing that the CPC has to do at a time like this is to increase the price.”

Global fuel prices are going up mostly due to the so-called Powell Bubble where the Federal Reserve is printing around 140 billion rupees violating its price stability mandate and trying to boost growth and unemployment, a failed strategy that led to chronic unemployment and stagflation in the 1970s.

The Fed is under pressure to stop printing money and hike rates with inflation at double the 2 to 2.5 percent levels it is supposed to generate.

In Sri Lanka money printed to keep rates down and boost growth has also led to currency falls and external troubles from which the country has still not emerged.

Sri Lanka’s current administration came to power criticizing a monthly fuel price formula put in place by the last administration to keep the domestic and external demand in check.

However in 2018 as the US also hiked interest rates to keep inflation in check, Sri Lanka printed money to target an output gap, triggering forex shortages, a currency collapse and earned a credit downgrade.

The CPC was made to borrow dollars, and it ran an 80 billion forex loss despite market pricing oil as the rupee it earned was parked in state banks in repos.

CPC is now seeking a 3.6 billion dollar credit line from Oman as money is printed creating forex shortages.

Energy Minister Udaya Gammanpila said the cabinet of ministers will have to approve a price hike.

“In October (CPC) is projected to lose about 10 billion rupees under current prices,” he said. “It can be more not less. Whether fuel prices are to be raised or not is a decision that the government has to take.

“We will inform the cabinet that we cannot bear this loss anymore. If the cabinet can give another relief they will tell. If not a price increase is necessary.

“It may not happen immediately. Last time it took three weeks of discussions to raise prices. I can say it will not happen in the next few days.”

Analysts have urged the central bank law to be tightened and commit to follow one monetary anchor so that economists cannot mis-use it to print money and boost growth.

There has been also been suggestions to incorporate specific sanctions for violating its mandate.

As long as politicians understand the concept of monetary inflation, they have to legislative power to control the central bank’s loose policy, abolish it and dollarize the economy, create a currency board like Singapore or Hong Kong, or have multiple currency competition. (Colombo/Oct08/2021)

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