Sri Lanka rupee depreciation hits petroleum retailer

ECONOMYNEXT – Depreciation of Sri Lanka’s rupee in 2017, generated an exchange loss of Rs7.0 billion at state-run Ceylon Petroleum Corporation, which is losing heavily on road fuel sales now, a finance ministry report said.

CPC has over 2.0 billion US dollars of working capital and legacy loans taken to give off-budget subsidies to customers in the past.

"As a result of maintaining a marginal operating profit and then the stable cash flow position during the period of first eight months, CPC was able to maintain the same level of its bank liability of US dollar 2 billion as reported at the end of the year 2016," a Finance Ministry report said.

"However, the depreciation of rupee against the US dollar has resulted to increase liability in rupee term and it has also resulted the CPC to incur exchange loss of Rs. 7 billion for the period."

The losses do not count the higher cost of import from rupee depreciation.

Sri Lanka has suffered high inflation, balance of payments trouble and rupee depreciation ever since a money printing or soft-pegged’ central bank was created in 1951 eliminating a currency board that kept inflation low and capital mobility free.

There has been insufficient reforms of the central bank to restrain the central bank to a more rule based, transparent policy framework. 

An upcoming inflation targeting law could reduce the discretion of the central bank to create unsound money, but the planned framework would be ‘flexible’ over which analysts have expressed fears over the implied discretion available to the agency.

The finance ministry said CPC is now running losses on selling road fuels but making profits on furnace fuel to the Ceylon Electricity Board.

"These losses are being recovered from the considerable profit margin of fuel sold for power sector mainly for CEB," the report said.





"This pricing mechanism has had negative impact on both CEB as well as CPC."

CPC officials said earlier that kerosene, petrol and diesel sales made a loss of 68 billion rupees in the first eight months of the year.

The finance ministry said CPC may be able to make a profit if crude prices stay below 52 US dollars a barrel and there is no further rupee depreciation. (Colombo/Nov

Sri Lanka has no automatic pricing mechanism for fuel and sudden borrowings from the CPC, which are sometimes accommodated by printed money as the central bank keeps rates low, generates balance of payments crisis. (Colombo/Nov22/2017)

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