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Thursday October 6th, 2022

Sri Lanka fuel price stabilization account Rs26bn in the red

ECONOMYNEXT – A fuel prices stabilization account, which was linked to a fund set up with printed money to fix oil prices according to an election promise given by the current administration to jettison a price formula, had a 26 billion rupee gap by the end of 2020, official data show.

Policymakers of the current administration, who slammed market pricing of fuel in 2018, set up the fund as a key part of an economic strategy to provide oil at fixed prices.

In Sri Lanka petrol is generally sold at around twice the import price with excise and other taxes imposed.

An import tax surcharge was put on fuel when petroleum prices fell to around 25 US dollars a barrel, the Finance Ministry said.

“During 2020, the Fuel Price Stabilization Fund (FPSF) was established, to transmit the gains arisen from the dip in the global oil prices..” the Finance Ministry said.

“This surcharge was removed with the oil prices moving upwards again.”

Economists and analysts have advocated market pricing of oil to exactly match domestic consumption with the balance of payments.

Rupee loans taken from state banks by energy utilities in the past had led to currency collapses because the central bank usually prints money because it is unwilling to allow short term rates to move up to maintain monetary stability.

Market pricing of fuel allows the central bank to maintain its policy rate without printing money and avoid a currency crisis.

Ironically however the Fuel Price Stabilization Fund was set up with 50 billion rupees of printed money (central bank credit) which could potentially lead to a reserve loss of around 275 million dollars when spent in the domestic economy.

“The Fuel Price Stabilisation Fund (FPSF) was established with a view to ensuring equitable distribution of the benefits of the unusual decline in international oil prices across the economy, rather than revising domestic fuel prices,” the central bank said.

“Accordingly, the Fund was established with an initial capital of Rs. 50 billion by issuing Treasury bills (on face value basis) to the Central Bank on 23 March 2020.

“The FPSF was partly utilised to settle the dues of the Ceylon Electricity Board (CEB) to the Ceylon Petroleum Corporation (CPC) during 2020, and the fund recorded a balance of Rs. 379.1 million at the end of 2020.”

However according to Finance Ministry data the account of the Fund was a negative 26.673 billion rupees by end December 2020.

At least 48 billion rupees was given to the CEB which in turn had repaid the CPC with the money.

How the account of the Fund was negative by 26 billion rupees at the end of 2020 or whether it was overdrawn or part of the initial contribution set off is not clear. (Colombo/June15/2021)

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