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Friday May 7th, 2021

Sri Lanka’s CEB needs Rs40bn bailout amid Rs89bn projected loss: Minister

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board needed a 40 billion rupee bailout from tax-payers now for fuel bought on credit amid an 89 billion rupee loss projected for 2019, Power Minister Ravi Karunanayake said.

"We need 40 billion rupees to pay Ceylon Petroleum Corporation immediately," Minister Karunanayake told parliament.

"The Treasury has projected a loss of 89 billion rupees for this year. But not a copper (thumber sutheryuk) has been given.

"The CPC had said they will stop supplying diesel if debts are not settled. We do not need 89 billion rupees but only 40 billion rupees."

In 2015, the Ceylon Electricity Board made an operational profit of 20.7 billion rupees helped by coal power and good rain.

Coal Fiasco

But Sri Lanka’s President Maithripala Sirisena, backed by environmentalists, axed a 500 MegaWatt coal plants and the current administration had been pushing expensive liquid fuel plants and also liquefied natural gas plants despite the country facing a debt crisis.

Instead of making profits to help repay part of the debt with the help of cheap power, CEB is now making losses and eating into taxes taken from people through foods and other goods.

The Central Bank, through a combination of policy errors and deliberate Mercantilism involving real effective exchange rate targeting, busted the currency from 130 to the US dollar by the end of 2014 to 180 to the US dollar by the end of 2018, critics have aid.

By depreciating the currency, Sri Lanka’s Central Bank has pushed up the rupee cost of all fuel and also the nominal (inflationary) value dollar debt of the energy utilities.

To cover the cost of depreciation and get back to the status quo, a nominal (inflationary) increase (in prices) is required in energy.

But no price increase has been given in a regulatory failure, now leading to a 89 billion rupee-estimated loss.

Hidden by Circular Debt

The cost of depreciation on the inflation index had been hidden so far by both the CEB and CPC taking on more debt.

"In the absence of implementing a cost-reflective pricing mechanism, CEB had to manage its liquidity requirements through borrowings from state banks and as such its borrowings had increased," a finance ministry report said.

"The total outstanding obligations to the banks at the end of November 2018 has increased to Rs. 67,015 million, compared to Rs. 24,393 million in the same period of 2017.

CPC also had high levels of debt partly due to unhedged forex loans exposures, although Finance Minister Mangala Samarawera partly offset the cost of rising oil prices and depreciation by market pricing fuel at great political cost.

"Operational and financial shocks of the CPC are temporary absorbed by the government-owned two commercial banks," the finance ministry said.

"Total amount payable to the two banks as at 30.11.2018 has reached up to Rs. 558,748 million. The depreciation of Sri Lankan Rupee against the USD also adversely affected the bottom line of the performance of the CPC."

Ceylon Petroleum Corporation lost 104 billion rupees in 2018, with 84 billion rupees of the loss coming from forex losses on loans on currency depreciation engineered by the Central Bank.

Meanwhile, Karunanayake said he was appealing to the Petroleum Minister to cut diesel prices.

"A one rupee cut in diesel will save us two billion rupees a year," Karunanayake said.

"We spend 233 billion rupees (a year) for diesel, naptha, and coal."

Financial Crisis

But the finance ministry said the CPC is in a severe financial crisis.

The finance ministry said that during the 11 months to November 2018, CPC cost of sales rose 27 percent to 475 billion rupees from 373 billion a year earlier.

"Hence, the CPC is currently facing a severe financial crisis resulted by finance costs and outstanding debts," the finance ministry said.

"In addition, a substantial portion of credit receivables amounting to Rs. 65,999 million as at November 30, 2018 adversely affected the current financial position of the CPC.

"CPC recorded an accumulating loss amounted to Rs. 313,182 million as at end November, 2018 associated with high levels of risk situation.

"Operational and financial shocks of the CPC are temporary absorbed by the government-owned two commercial banks. Total amount payable to the two banks as at 30.11.2018 has gone up to Rs. 558,748 million."

The debt of 558 billion rupees is about 3.8 percent of the 2018 gross domestic product. Sri Lanka’s national debt rose to 84 percent of GDP in 2018 from 79 percent a year earlier, partly due to currency depreciation despite Samaraweera raising taxes to cut the deficit. (Sri Lanka national debt soars to 84-pct of GDP amid soft-peg collapse, REER targeting),_REER_targeting-3-13668-1.html Finance Minister Samaraweera had covered part of the operational cost of depreciation through tax cuts, which could also have gone for debt repayment.

In January, private credit turned negative for the first time since 2014, partly due to tightening after monetary instability and party due to a shock from a political crisis.

After slowing credit and the economy in 2019, the Central Bank has allowed the rupee to appreciate to 175 to the US dollar by the beginning of April.

There have been calls to reform Sri Lanka’s Central Bank by passing laws that blocks the Central Bank from printing money and generating monetary instability whenever it wishes, in ‘independent monetary policy’, which will return the country to sound money based on economics rather than Mercantilism.

Analysts say allowing the rupee to strengthen using a period of weak private credit may help.

But the effects on domestic credit of an 89 billion rupee loss by the CEB or a greater volume depending on the amount of emergency power are not known. (Colombo/Apr03/2019-SB).

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