ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation has made profits of 120.3 billion rupees, helped by a 20 billion forex gain and a lower interest bill, compared to 617 billion rupees when the currency collapsed in the previous year.
In 2022, CPC posted a loss of 617.5 billion rupees, with 529.4 billion rupees coming the rupee was busted through un-anchored policy operated by macroeconomists to enforce rate cuts and a failed attempt to float the currency with a surrender rule in place.
A surrender rule involves pegging (a strong side convertibility undertaking).
Losses and Dollar Debt from Anchor Conflicts
The CPC had accumulated large volumes of debt by converting suppliers import bills taken during times of forex shortages triggered by central bank money printing to suppress rates for flexible inflation targeting/potential output targeting.
The CPC has made losses and run up large debts including in 2018, when fuel was market prices as the rupee collapsed when money was printed for flexible inflation targeting.
By end 2019 the CPC had ended up with 566 billion rupees worth of debt to state bank banks.
Read Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt
When forex shortages are triggered by reverse repo or standing facility-backed rate cuts, CPC cannot pay for its imports by converting rupee revenues to dollars, nor can the central government repay foreign loan installments falling due by converting rupee cash flows from taxes or domestic debt.
The forex shortages from flexible inflation targeting/potential output targeting leads to rapid ratcheting up of foreign debt, regardless of the level of the actual annual deficit, analysts have shown.
READ How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether
From around 2020, the CPC returned to fixed fuel prices abandoning a price formula under the then ideology followed by macroeconomists advising the then president, who printed even more money to target ‘potential’ output. Taxes were also cut in another macroeconomic policy to close an output gap.
The ideology that money printing drives growth and that there is such a thing as potential output which can be calculated by mathematics or statistics has now been incorporated into a new IMF backed monetary law, critics have pointed out.
The IMF gave technical assistance to calculate potential output to a country that had emerged from a 30-year civil war without default.
Monetary Instability Driven Debt
By end October 2022, the CPC had debt of 1,042 billion rupees to state banks following the currency collapse and a further 228.8 billion rupees under a Government of India credit line, according to an earlier finance ministry report, during the worst forex shortages triggered by macroeconomists since the central bank was set up in 1951,
The flexible inflation targeting (targeting inflation without a clean float) linked loans of the CPC as well as loans taken for subsidies have since been taken over by the government.
The government took over guaranteed foreign currency dollar loans and bills equivalent to 884 billion to the Government balance sheet at the end of 2022, against which an equity infusion of 884 billion was made to the Ceylon Petroleum Corporation, the Finance Ministry report said.
It is not clear how the numbers relates to the budget deficit of the year.
Analysts have called for strict laws to be brought against the central bank to block its ability to cut rates with printed money and trigger forex shortages using dual anchor conflicting operating frameworks as the British parliament did against the Bank of England in the 1840.
By end-2022, CPC debt to banks was listed as 87.7 billion rupees. By end-2023 the debt was listed as 59.02 billion rupees.
In 2022 forex losses were 529 billion rupees.
In 2023 as the central bank allowed the rupee to appreciate, amid deflationary monetary policy, a 20.3 billion rupee forex gain was reported.
It was not clear whether the gains were made from the timing difference on LC settlement on ongoing transactions or residual dollar obligations.
When macro economists destroy money through various Anglophone inflationist ideologies that developed in the last century (which German classical economists called the ‘spurious monetary doctrines of the Allies) and made acute after the IMF’s Second Amendment in April 1978 triggering un-anchored money, neither SOEs nor central government or household budgets can be run with any kind of stability.
Waves of sovereign defaults started with a couple of years of the Second Amendment, starting from Latin America as the Fed tightened policy and the countries tried to suppress policy rates.
Before the Second Amendment and the collapse of the Bretton Woods, external defaults were very rare and the IMF did not need a defualt work out process. However according to some surveys, 58 percent of defaulted countries since 1978 have defaulted again.
Stronger Balance Sheet
CPC’s finance costs also fell to 7.4 billion rupees in 2023, from 119.5 billion rupees in 2022 with lower levels of debt.
In 2023, the CPC earned revenues of 1,343 billion rupees, up from 1,193 billion in 2022. Cost of sales were 1,223 billion rupees, almost unchanged from 1,101 billion rupees in 2022.
Sri Lanka has allowed Sinopec and another two distributors to enter fuel distribution. Sinopec has already started distribution.
In Sri Lanka, other distributors including Lanka IOC piggy-back on CPC pricing and make profits with a leaner cost structure and also pay taxes. It is not clear whether price formula takes into account the lower debt levels of the CPC, though margins were reduced. (Colombo/June11/2024)