ECONOMYNEXT – Sri Lanka will keep oil prices fixed and build a 200 billion rupee fuel price stability fund, Minister Bandula Gunewardane said as global prices collapsed amid a Coronavirus pandemic.
Taxes will be levied on fuel to take out cash from oil distributors and build a fund, which will be used to repay debt of the Ceylon Petroleum Corporation and Ceylon Electricity Board.
The government is planning to keep fuel prices fixed for the next 12 months, he said.
Brent Crude has fallen below 35 dollar a barrel amid a global Coronavirus pandemic.
Sri Lanka’s new administration halted a price formula after coming to office in November 2019.
Minister Gunewardene said in 2018, though there was a price formula the Ceylon Petroleum Corporation had run a loss of over 100 billion rupees.
Most of the losses however had come from a foreign exchange loss, where the CPC had borrowed or had been forced to borrow dollars to run an unhedged open position.
Similar unhedged dollar positions have been run before, including with credit from Iran.
Economic analysts believe that such actions are done due to lack of knowledge of classic economic theory and a strong belief in Mercantilism.
Many in Sri Lanka believe that oil gold or cars imports (trade), have something to do with currency depreciation and balance of payments trouble (monetary instability) rather than liquidity injections of the central bank (money and credit).
Over the last few weeks tens of billions of rupees of excess liquidity has been injected to the banking system though outright central bank credit, a reserve ratio cut and a seniorage profit transfer from the monetary authority. (Colombo/Mar19/2020)