An Echelon Media Company
Thursday October 6th, 2022

Sri Lanka preparing agreements for US$3.6bn for Oman credit line amid money printing

ECONOMYNEXT – Sri Lanka is now preparing agreements for a 3.6 billion US dollar credit line for oil imports from Oman, after the cabinet of ministers gave the nod for the deal Petroleum Minister Udaya Gammanpila said as money printing created forex shortages.

“The cabinet of ministers had given the approval to get a 3.6 billion dollar credit from Oman and we are now preparing the agreements,” Minister Gammanpila told reporters.

“We (Ceylon Petroleum Corporation) have prepared a 500 million dollar credit line from India and sent it for Treasury. The treasury will then present it to the Cabinet of Ministers.”

He said in the meantime Central Bank Governor Nivard Cabraal has promised to supply the required foreign exchange for fuel imports.

“The central bank Governor has promised to supply dollars for this month’s fuel imports,” Minister Gammnapila said.

“After that we will import fuel through the credit lines. As a result there will be no fuel shortage as dreamed by the opposition.”

“In the foreign exchange shortage Sri Lanka is now facing the first priority was for essential foods, the second was for medicines. The third priority is for fuel. So there is no reason for a fuel shortage.”

Sri Lanka’s state-run Ceylon Petroleum Corporation has in the past borrowed dollars from domestic banks and suppliers as the central bank printed money to keep rates down and triggered forex shortages.

The loans then create large losses, which analysts have dubbed ‘Nick Leeson losses’ for the utility.

Printing money (running inflationary policy) and making the CPC borrow dollars as the country runs of forex is one several cascading policy errors that created external crises in Sri Lanka and sharply raising external liabilities.

In another cascading policy error the central bank after giving dollars for current imports will also have to ‘sterilize’ the intervention by printing more money to maintain the current policy rate of 6.0 percent, losing forex reserves but not allowing reserve money to contract by the same amount.

Sri Lanka is in a forex crisis after the central bank printed money to finance the deficit and keep rates down after cutting taxing, instead of allowing rates to go up and finance the gap with real borrowings, cripping bond and forex markets.

The central bank has allowed bond yields to go up in a bid to make the markets work. However so far only three months bills are drawing investor interest.

The CPC is making large losses from the sale of fuel after paying taxes as prices rose sharply in global markets.

Lanka IOC, a unit of Indian Oil Corporation raised prices by around 5.0 rupees a litre as crude and refined oil prices rose in global markets.

Gammanpila said as yet there was no decision to raise CPC prices. (Colombo/Oct21/2021)

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