ECONOMYNEXT – Sri Lanka’s non-financial public sector enter which lost 910 billion rupees in 2022, as macro-economists printed money to boost growth and bungled a float with a surrender rule has made profits of 282 billion rupees in 2023, official data shows.
In 2022 the same state owned enterprises made 910 billion rupees of losses.
A major turnaround was seen in Ceylon Petroleum Corporation which lost 617 billion rupees in 2022 as the currency collapsed and the country was hit by forex shortages as the central bank printed money.
Forex Shortages
The CPC losses partly came from loans it was forced to take when the central bank made rate cuts with printed money for flexible inflation targeting and potential output targeting, and officials made the petroleum utility take suppliers credits, in prior years critics have said.
The suppliers credit were then turned into state bank loans as the currency collapsed, endangering the banks.
The loans were then taken to the government adding to the national debt and to be serviced by the tax payer.
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In 2022 Sri Lanka also defaulted and the incumbent administration was ousted amid social unrest.
The monetary instability from activist macro-economic policy came after the country survived a 30-year war without default.
Both the Ceylon Electricity Board and CPC made steep price hikes backed by Energy Minister Kanchana Wijesekera and the political leadership to compensate for the cost hikes from monetary instability, as the 17th IMF program was implemented.
Tax payer money
Despite the profits, the Treasury in 2023 also injected 261 billion rupees to boost the quity and 15 billion rupees in operational support for some of entities totaling 276 billion rupees.
The CPC was also owed money from the Ceylon Electricity Board, and SriLankan Airlines. Such arrears, called ‘circular debt’ accumulate in between energy utilities other countries with bad central banks including Pakistan.
Circular debt is a feature of all currency crises including in Sri Lanka’s earlier crises, as politicians resist raising energy prices, when macro-economist debase money.
READ MORE: Pakistan’s energy sector: Growing burden of circular debt
Some SOEs however paid dividends in 2023.
In 2023, the central bank operated largely deflationary policy and allowed the rupee to appreciate after lifting a surrender rule.
In 2022, the central bank itself, which borrowed dollars and spent them and printed money to sterilize the interventions to suppress interest rates, like the CEB suppressed its tariffs also made a record loss on its borrowings.
The rupee is still under inconsistent policy, but policy has so far leaned towards monetary stability with the monetary authority undershooting a 5-7 domestic inflation target.
Monetary Stability
The Ceylon Electricity Board in particular has cut prices in 2024 as imported fuel prices fell with rupee appreciation and there were also good rains.
RELATED: Sri Lanka central bank mainly responsible for electricity price cut
In Sri Lanka from 1978 in particular, when the central bank lost a credible anchor money, after the International Monetary Fund’s Second Amendment to its Articles, energy and other prices only went up.
Electricity prices were only cut in 2014 after a Chinese funded coal plant came on stream.
Countries that lost a credible anchor also started to default after 1978 starting from Latin America which was closest to the US and were among a close group of founder members of the International Monetary Fund along with the US and UK.
Sri Lanka escaped default in the 1980s, as the country did not have commercial foreign debt unlike Latin American nations, but a reform program started by then President J R Jayewardene was discredited amid high inflation and depreciation and the country suffered chronic strikes and social unrest.
In 2023, only 11 non-financial state enterprises out of 41 tracked by the Finance Ministry made losses. They included firms in construction, media and plantations. State plantations companies made losses despite high tea prices.
Expenses of the SOEs is also expected to rise when salaries are raised to account for rupee depreciation.
The rupee appreciated from around 370 to 323 during the year.
(Colombo/July17/2024)