Sri Lanka’s CPC in shocking Rs628bn loss on soft-pegging loans

- economynext.com

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation has lost 628 billion rupees in the first four months of 2022, driven by un-hedged dollar loans it was forced to take over the years whenever the central bank printed money to create forex shortages.

It now had a negative net worth of over a trillion rupees.

The CPC had borrowed over 3 billion dollars from two state banks after importing oil on credit without buying dollars in the market whenever the central bank printed money to manipulate rates and created forex shortages and currency crises in the course of operating a flexible inflation targeting regime.

The CPC had made an operating loss Rs64.95 billion rupees, up from Rs15.7 billion a year earlier, as oil prices went up but the entire balance came from forex loss.

“The exchange rate loss during the first four months of 2022 was Rs. 549,955 million compared to Rs. 26,738 million recorded in the same period of 2021,” a Finance Ministry report said.

“This has led to the CPC ending up with an overall loss of Rs. 628,381 million at the end of April 2022.”

The CPC had been forced to import oil on dated letters of credit when the central bank blocked market interest rate with printed money, creating forex shortages. The loans had accumulated in the 2016, 2018 and 2020 soft-peg crises.

The LCs were then repaid with dollars from the two state banks, officials had revealed earlier. Analysts have labeled the blunder a Nick Leeson style blunder coming from operating a soft-pegged exchange rate and output gap targeting.

“The total liability payable to the two state banks as at 30.04.2022 has reached Rs. 1,223,635 million,” the finance ministry report said.

“The CPC’s accumulated losses and negative net worth amounted to Rs. 1,047,391 million and Rs. 985,886 million, respectively as at end April 2022.:

A Treasury guarantee of Rs 596.77 billion had been issued to the People’s Bank to cover its loan.

A Treasury guarantee of Rs 593.99 billion had been issued to the Bank of Ceylon to cover its dollar loan to the CPC.

Analysts and economists have called for the monetary law to be tightened to take away the independence of the central to print money at will to manipulate interests rates, de-stabilize the currency and create forex shortages. (Colombo/July04/2022)

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