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Central Bank calls for fuel pricing formula

12 Nov 2021

  • Volatile global energy market cited as reason
  • CBSL says formula would ensure ‘financial viability’ of CPC
  • CPC owes state banks $ 3.6 b
BY Shenal Fernando The Central Bank of Sri Lanka (CBSL), in a report released yesterday (11), called for the adoption of a suitable cost-reflective pricing mechanism for fuel, considering the volatility observed in global energy market prices. The report, titled “Recent Economic Developments: Highlights of 2021 and Prospects for 2022”, stated that such a mechanism would be vital to ensure the financial viability of the now loss-making Ceylon Petroleum Corporation (CPC) and, thereby, stabilise the banking sector considering the current external environment of the country. It should also be noted that the current Government, which was the Opposition during the regime headed by Maithripala Sirisena, continuously criticised the fuel pricing formula that was introduced by late Minister of Finance Mangala Samaraweera in May 2018. Though the current Government did not officially abolish the formula, they publicly said they will not be implementing it as soon as they came into power. CBSL added that such a pricing mechanism would also “improve transparency and thereby improve the general public’s acceptance of much-needed regular price revisions in relation to these imported products”. According to the CBSL, increased global demand and supply conditions led to the increase of global crude oil prices. Consequently, the average Brent prices increased to $ 67.8 per barrel during the nine months ended September, which represents a 58.3% Year-on-Year (YoY) increase compared to the corresponding period in 2020. Similarly, the average price of crude oil imported by CPC during the first nine months of 2021 has also increased to $ 66.96 per barrel, which represents a YoY increase of 47.8% when compared to the average import price of $ 45.31 recorded over the corresponding period of 2020. During the month of October, global crude oil prices increased further with Brent prices reaching a three-year high of $ 86.7 on 25 October, before settling at around $ 83 as of yesterday. Speaking to The Morning Business previously in October, Minister of Energy Udaya Gammanpila claimed: “We are losing Rs. 31 per litre of diesel and Rs. 15 per litre of petrol. As of September 2021, the CPC incurred a cumulative loss of Rs. 83 billion. There is no institute in Sri Lanka, or in the entire history of Sri Lanka, that recorded such a colossal loss.” Gammanpila further stated that consequently, the CPC owes an accumulated debt of over $ 3.6 billion to Bank of Ceylon (BOC) and People’s Bank. Increase in global crude oil prices has been exasperated by the surge in natural gas prices observed in Europe and Asia following the recent energy crunch. Consequently, many sectors are looking to switch to oil from gas wherever it is economically feasible, which is thus leading to increased oil demand. According to Rystad, an energy consultant, the gas-to-oil switching could reach as much as one million barrels per day this winter, and based on such forecasts, it is likely that the price of crude oil may reach $ 100 per barrel by the end of the year. The CBSL report further claims that measures taken by the Government of Sri Lanka (GoSL) and the CBSL to increase inflows will result in the gross official reserves remaining at around $ 3.5 billion by end-2021 and will strengthen to an average of around $ 4 billion in 2022. Explaining further, it provides that financial inflows to the country will increase in the medium term and that such inflows will take the form of “international swap arrangements, foreign currency term loans, project loans to the Government, and monetising of non-strategic assets”. Moreover, expediting several foreign direct investment (FDI) projects in the pipeline as well as increasing worker remittances are expected to bolster the official reserves. In addition, the tourism sector is also expected to experience a strong recovery backed by the Government’s proactive measures in containing the Covid-19 pandemic, which will also facilitate the maintenance of reserves at the mentioned levels.


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