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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka energy SOE losses projected at 1.0-pct of GDP

Sri Lanka energy SOE losses projected at 1.0-pct of GDP

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Malika1990

Malika1990
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
July 28, 2012 (LBO) - Sri Lanka's state energy enterprises will make losses of about one percent of gross domestic product, a lower than 1.75 percent GDP loss made in 2011, an International Monetary Fund report has said.

Energy prices were raised in February 2012 after massive unproductive bank credit taken to manipulate energy prices drove the country in to a balance of payments crisis compounded by sterilized foreign exchange sales by the Central Bank.
An IMF staff report which supported the final review under a three year bailout program said higher tariffs and lower oil prices were helping reduce some of the losses.

"Some of this gain, however, is being offset by poor rainfall that has induced a shift in electricity generation from relatively cheap hydro to expensive thermal," the staff report said.

"On balance, the combined losses of the CEB (Ceylon Electricity Board) and CPC (Ceylon Petroleum Corporation) are projected to fall to around one percent of GDP in 2012, from about 1¾ percent last year."

The projected GDP for 2012 by Sri Lankan authorities is about 7,500 billion rupees.

Sri Lanka last year claimed to have run a budget deficit of 6.9 percent of GDP, but maintained spending and borrowed money from banks through state energy enterprises to run a public sector deficit close to 9 percent of GDP.

A decision to undermine a regular review to power prices under Sri Lanka's Public Utilities Commission and manipulate power prices, was specifically announced in the budget.

Though the IMF program had a requirement to make energy enterprises break-even it was not a performance criterion of the program.
An IMF program typically has three targets; net domestic borrowing, reserve money which is basically domestic currency notes or obligations created by the Central Bank which are exchangeable for foreign currency, and foreign reserves.

The energy price manipulation was captured in the program when the Central Bank lost foreign reserves by trying to manipulate interest rates, as credit demand surged.

The rupee fell from 110 to 134 to the US dollar pressured by sterilized foreign exchange sales.

LBO's economics columnist fuss-budget says an IMF program that has a single performance criterion - an end of period stock of net domestic assets of the Central Bank - could keep the exchange rate and inflation stable.

Such a target will force an automatic interest rate adjustment when credit demand surges due to state or private sector activity.

A ceiling on net domestic assets limits the total amount of new obligations that can be created against Treasury bills during a given period on the central bank balance sheet, which can come up for redemption against foreign reserves via the forex market.
http://www.lbo.lk/fullstory.php?nid=650855965

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