ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation owed 1,035 million dollars taken after transferring 2.44 billion US dollars borrowed from local banks during periods of monetary instability, official data showed.
The central government had taken over 1.34 billion US dollars of loans from Bank of Ceylon and 1.09 billion US dollars from People’s Bank, a Finance Ministry report said.
Over the years CPC had been forced to borrow from banks after forex shortages emerged from flexible monetary policy (flexible exchange rate/flexible inflation targeting and its peers) involving conflicting money and exchange policies.
The CPC had taken credit from oil suppliers as economists engaged in aggressive open market operations to suppress interest rates, triggering forex shortages in peacetime. The letters of credit had then been converted to loans at state banks.
However more monetary instability borrowings remained.
The CPC owed 251 million US dollars on a loan taken by Sri Lanka from the National Iran Oil Company. The credit was taken decades ago during a forex crisis in the midst of a civil war, when the practice of borrowing excessively during forex shortages began.
The CPC also owed 697 million US dollars to the Treasury on a credit line from India taken during 2022 crisis, which was the worst in the history of the central bank.
Additionally, another 87 million US dollars was owed to the Bank of Ceylon. CPC was also owed money by the Ceylon Electricity Board (CEB) and Sri Lanka Airlines (SLA).
“The treatment of these residual liabilities and cross liabilities between the CEB, SLA, and CPC would be addressed in the Government’s overall strategy for restructuring the balance sheets of key SOEs,” the report said.
As the rupee collapsed the CPC was hit with a loss of 527 billion rupees.
Analysts and classical economist suggested that the power to mis-target rates through aggressive open market operations be taken away from the central bank so that forex shortages and depreciation is eliminated in the future.
A special economic zone at Colombo Port City would be dollarized, eliminating forex shortages from open market operations. (Colombo/June06/2023)