More Price Increases In The Offing Economist Warns

With state owned Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) still in the red despite the recent price hikes, expect more price increases, an economist warned.
Former Deputy Central Bank of Sri Lanka (CBSL) Governor W. A. Wijewardena speaking at a seminar on the exchange rate (ER) on Tuesday said that even after the recent fuel price increases, state owned Ceylon Petroleum Corporation (CPC) is expected to make a Rs. 63 billion loss this year.
Ceylon Electricity Board (CEB), another Government controlled entity, Rs. 63 billion, though that was before last month’s 40% fuel readjustment charge.
He further said that two other state institutions, namely SriLankan Airlines is expected to make a Rs. 12 billion loss and Mihin Air Rs. three billion. “All government corporations are run at a loss,” claimed Wijewardena, in this seminar organized by the Exporters’ Association of Sri Lanka.
He further said that CPC made a Rs. 10 billion loss in 2010 which increased to Rs. 90 billion last year.
Former Director Economic Affairs, Economic Division, Commonwealth Secretariat, Dr. Indrajit Coomaraswamy, another speaker at the event said that the root cause of this problem was budgetary management.
He said that though the Government envisaged containing the budget deficit at 6.9% of GDP last year, it may well have had shot up to 7.8%.
He also said that due to the misalignment of policies, the real effective exchange rate was over valued by 25%. Inflation, during the 2005-2008 period averaged at 14%.
Coomaraswamy said that while Sri Lanka is a middle income country with poverty down to 8.9% and per capita GDP having had increased to $ 2,750;  but on the flip side 40% of its population were living on handouts, which was a contradiction.
He attributed this to politicization and leakages, with the net effect being that some of the vulnerable being denied of their Samurdhi benefits.
Speaking further, Coomaraswamy said that to curb inflationary pressure bank lending has been capped at 18% this year with a further 5% increase permitted from overseas borrowings, but the hitch here is the ER risk when borrowing offshore, said Coomaraswamy.
While it’s true that 50% of the ER risk has been hedged by CBSL for a year, what happens if banks resort to external borrowings of tenures of between 3-5 years? he asked.
Coomaraswamy further said that CBSL was following the market:
Though CBSL increased policy rates by 50 basis points recently, market interest rates hiked much more rapidly than the policy rate increase, he said.
On oil, Coomaraswamy said that the price of a barrel of oil which averaged at US$ ($) 79 in 2010 went up to $ 108 last year, with the country’s oil bill during this period increasing from $ three billion to $ 4.5 billion.
He also said that it was imperative to build regional supply chains, particularly in the context of taking advantage over some of the fast growing South Indian states.
Former CBSL Director Statistics Dr. (Mrs.) Anila Dias Bandaranaike another speaker at this event highlighted Government’s/CBSL’s policy inconsistencies.
She said that while CBSL targeted for an 18-19% credit growth last year, but it ended up with 34% figure. Similarly they envisaged broad money to grow by 14.5%, whereas it actually grew by 19%, said Bandaranaike.
She emphasized the importance of speedy information flow that would help investors’ decision making process.
Bandaranaike said that it’s possible for CBSL to give the country’s reserves’ position after a few weeks, but it doesn’t happen that way. Similarly trade statistics could also be made available in a couple of weeks, she said (See also connected stories found on pages 42 and 43).