ECONOMYNEXT – Sri Lanka’s top five state enterprises have lost 931 billion rupees in the first four months of 2022, official data shows, with a collapse of a soft-peg due to aggressive open market operations of the central bank contributing to most losses.

The Ceylon Petroleum Corporation lost 628 billion rupees, with 541 billion rupees of the gap coming from a foreign exchange loss as a soft-peg operated by the central bank collapsed steeply after two years of money printing.

The forex loans were also taken to buy oil when the central bank created forex shortages through aggressive open market operations during the current and past currency crises.

Currency crises and forex shortages are a problem associated with soft pegs where money and exchange policies conflict.

Once a clean floating regime or a hard peg is adopted forex shortages disappear as if by magic.

The CPC also assumes the losses of the Ceylon Electricity Board indirectly by giving fuel on credit and taking loans to fund its own cash flow shortages due to delays by the Public Utilities Commission of Sri Lanka to grant it price increases.

The prices are hurriedly raised under an IMF program. CEB prices were raised through an IMF program in 2012, prior to a float of the currency, but it was later reversed as a China-funded coal plant came online and a price increase was not granted despite several requests.

The Finance Ministry implemented a price formula for CPC under an IMF program in 2018 as a structural benchmark as prices were directly under political controls but the CEB which was under regulation missed structural benchmarks and indicative targets.

“Ceylon Electricity Board (CEB) continued to record losses throughout 2019H1 (-0.5 percent of GDP), due to hydropower shortages, high generation costs, and lack of adjustments in retail prices,” an IMF staff report said in 2019 at the tail end of the last program.

“The end-June and end-September ITs on Non-Commercial Obligations of CPC and CEB were
both missed.”

Sri Lanka re-nationalized state enterprises like Sri Lankan Airlines and Litro Gas under then-President Mahinda Rajapaksa and his economic advisors who advocated state expansion and the next administration which critics say had policy fright did not privatize a single entity.

Both Sri Lanka and Pakistan which have the worst central banks in South Asia have severe problems with SOE losses, mostly coming from currency depreciation.

In Sri Lanka the classical economic principle of sound money has been discarded in favor of Mercantilism and monetary instability which became popular in Western academic circles in the wake of the Great Depression in general and up to 1971 in particular.

Dual anchor conflicts, which did not exist in South Asia when it was in the Sterling Area under British rule, burst forth under the post-World War II failed Bretton Woods system, leading to forex shortages, trade, and exchange controls.

Western nations exited dual anchor conflicting soft-peg in 1971 (Japan, Germany, Singapore, Thailand, Hong Kong, kept highly consistent pegs under the Bretton Woods and after) with the collapse of the Bretton Woods.

Soft pegs continue to be peddled to and embraced in South Asia under ‘monetary reform’ ‘monetary policy modernization’ and ‘central bank independence’, critics say.

Sri Lanka’s ‘economists’ favor currency depreciation based on a neo-Mercantilist belief that undermining a sound monetary system to tilt the playing field towards exporters at the expense of their workers profiting from a delay in wage catch-up, will make the country an export powerhouse, despite the policy creating industrial unrest and civil strife for over half a century.

“The days are gone in which most persons in authority considered the stability of foreign exchange rates to be an advantage,” explained classical economist Ludwig von Mises. “Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital.

“It is one of the methods of economic nationalism. Few people now wish for stable foreign exchange rates for their own countries.

“The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measures for various kinds of commodities
and labor.

“Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent.

“These people profiteer by virtue of their fortunate position. For them, inflation is good business. Their gains are derived from the losses of other sections of the population.

“Modern monetary theory has provided us with the irrefutable demonstration that this disproportion and non-simultaneousness are inevitable features of every change in the quantity of money and credit.”

In 2022, unrest is not only be found in Sri Lanka. Strikes are spreading and incumbent rulers are losing office in Europe and elsewhere after the Federal Reserve, the European Central Bank, and the Bank of England also printed money to ‘create jobs in 2020 and 2021. (Colombo/July08/2022)