ECONOMYNEXT – Sri Lanka’s government has taken over loans of 2.435 billion US dollars borrowed from state banks by state-run Ceylon Petroleum Corporation, which have been converted to term loans, a Finance Ministry report showed.
In 2024, taxpayers have effectively taken over 788.6 billion rupee equivalent in state bank loans to the CPC, under Treasury guarantees, the Auditor General’s report on Treasury accounts show.
A 410.4 billion rupee equivalent forex credit from the Bank of Ceylon to the CPC and default interest of 73.6 billion rupees had been converted to a US dollar term loan.
A 136.6 billion rupee equivalent forex loan and default interest of 30.4 billion rupees had been converted to 224.3 million equivalent dollar term loan.
Another 224.3 billion rupee equivalent US dollar loan and default interest of 38.2 billion rupees had been converted to rupee treasury bonds.
By the end 2024, the term loan to the Bank of Ceylon was 1,582 million US dollars, and term loans to the People’s Bank was 546 million dollars. Treasury bonds given to the People’s Bank was 262.58 billion rupees.
The CPC has been forced to take suppliers’ whenever forex shortages emerge after macroeconomists cut rates with inflationary open market operations under ‘central bank independence’.
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Suppliers’ credit is taken even when the CPC market prices fuel prices as happened in 2018 after rate cuts trigger forex shortages. The supplier’s credits are then settled with dollar borrowings from state banks.
State banks sometimes take foreign loans and engage in dollar rupee swaps to manage the crisis.
The currency collapse that follows the inflationary rate cut then triggers large losses in the CPC even if fuel is market priced.
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Suppliers credit and state bank loans have also been used to cover losses in some years, after failing to market price fuel as the currency collapses or when global prices go up from commodity bubbles fired by Fed rate cuts.
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Suppliers credit (or loans) taken as forex shortages emerge further widens the external current account deficit. Macroeconomists then blame forex shortages and currency collapses on the ‘current account deficit’ as classical Mercantilists blamed the trade deficit or ‘commercial balance’.
Analysts have pointed out that soaring dollar debt of CPC at each currency crisis from rate cuts was a microcosm of foreign borrowings that took place including through Active Liability Management Act, through sovereign bonds and syndicated loans, instead of settling maturing loans and interest in dollars after maintaining monetary stability with deflationary or neutral policy.
In 2017 and 2019, when deflationary policy was followed, some of the supplier credit linked loans of CPC were settled in the stabilization crises when the rate cuts were reversed.
The foreign borrowings by the central government and state banks and state enterprises themselves may allow general interest rates to be suppressed across the yield curve and artificially boost domestic credit in a feedback cycle.
Forex shortages emerge when rates are cut by an age-of-inflation reserve collecting banks on statistical formulae (historical inflation, potential output under flexible inflation targeting), rejecting economics, primarily the price specie flow mechanism described by David Hume and later elaborated by other classical economists including David Ricardo and James Mill.
Under central bank independence both politicians and the parliament are helpless to prevent inflation and monetary stability.
Before open market operations were invented in the 1920s leading to the age-of-inflation and depreciation sovereign default without war, parliaments had tightly controlled operating frameworks of central banks through strict laws to eliminate or reduced discretion (flexibility).(Colombo/June26/2025 – Corrected para 1, )