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Fuel price revisions: Cabraal urges immediate fuel price hike

19 Feb 2022

 
  • Letter sent to Ministers of Finance and Energy on 28 January 
  • Says CPC needs credible plan to repay outstanding debt to banking sector
  • Cabraal advises Rs. 30 price hike for petrol and Rs. 39 for diesel
  • If State taxes are reduced, fuel price revision will be small: Gammanpila
  By Marianne David The Ceylon Petroleum Corporation (CPC) should devise a credible plan to repay its outstanding debt to the banking sector, which warrants an immediate cost-reflective price revision, while fuel demand management measures need to be urgently implemented, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal has asserted, The Sunday Morning learns. “It must be clearly understood that in the absence of such a price revision, the CPC will fail, thereby substantially weakening the two State-owned banks and threatening the stability of the entire financial system,” Cabraal has stated in a letter to Minister of Energy Udaya Gammanpila, copied to Finance Minister Basil Rajapaksa, dated 28 January, calling for the urgent revision of domestic petroleum prices for demand management. The CBSL Governor has recommended the revision of domestic prices of key petroleum products to be comparable to those in the region. “Accordingly, we strongly recommend that petroleum prices be revised upward as follows: (a) Petrol: Increase by Rs. 33 to Rs. 210 per litre (approximately $ 1.05), and (b) Auto Diesel: Increase by Rs. 39 to Rs. 160 per litre (approximately $ 0.80),” the letter has noted. Cabraal further states that there is also a pressing need to improve the Treasury operations of the CPC, adding that experienced and competent personnel are urgently needed to oversee its Treasury operations, and until the CPC is able to recruit qualified persons for this purpose, says that the CBSL will be prepared to assign a senior Chartered Accountant from its cadre to the CPC for a specified period to provide the required technical assistance for the Treasury operations of the CPC. Cabraal has also stated: “It is my earnest request that these measures are urgently implemented to address the acute shortage of foreign exchange, and to ensure the financial viability of the CPC, thereby paving the way for the safeguarding of macroeconomic and financial system stability.” “Accordingly, as a vital measure to address such pressures without negatively impacting the continuity of economic activity, a cost-reflective price revision is urgently warranted,” he has added. Pointing out that that there is a dire need for focused efforts to limit the usage of petroleum products in light of the external sector issues that the country is facing at the moment, Cabraal has stated that this situation has significant negative implications on the banking sector and on overall macroeconomic and financial system stability, warranting urgent remedial measures. “It has to be noted that Sri Lanka expended approximately $ 3.4 billion on petroleum imports during 2021. With the normalisation of domestic economic activity, including the reopening of the tourism sector, and the steadily rising global crude oil prices, it is projected that it could rise further. Furthermore, continuation of the current upward trend in crude oil prices and higher importation of refined products due to refinery closures, as seen in January 2022, could cause further increases in the fuel bill. This reiterates the importance of urgent implementation of demand management measures to curb the demand for fuel,” Cabraal has noted. The letter has stated that as per available data, the losses of the CPC stood at approximately Rs. 77.4 billion as at November 2021, and the credit extended by the two State-owned banks to the CPC in foreign currency loans amounted to $ 3.7 billion. “With due consideration to such financial performance of CPC, an immediate upward revision is essential to improve its rupee liquidity position. It is only by doing so that CPC would be in a position to purchase foreign currency for settlement of its foreign currency loans,” Cabraal has stated. “It is also noted that the rupee equivalent of CPC’s forex loans of $ 3.7 billion would amount to approximately Rs. 760 billion. As you are aware, the CBSL has already mandated the sale of 25% of converted US Dollars to the CBSL on a weekly basis by the licensed banks. In addition, the CBSL has also announced the distribution of financing a part of essential import bills for fuel purchases (amounting to approximately $ 250 million per month) among the licensed banks in proportion to their foreign exchange flows. Banks have already agreed to support this effort as advised by the CBSL, on the basis that the rupees will be provided by the CPC to purchase foreign exchange,” he has added. Meanwhile, the CBSL Governor has also noted that it was “of utmost importance that the CPC should devise a credible plan to repay its outstanding debt to the banking sector”. Speaking to The Sunday Morning, Energy Minister Gammanpila stated that the final nod on a fuel price hike should come from Finance Minister Basil Rajapaksa, adding: “The Central Bank Governor has earlier written to the Minister of Finance, who had not replied.” He further stated that the total daily loss incurred by the CPC was around Rs. 550 million per day, adding, however, that of this loss, Rs. 300-400 million was taxes. “If the taxes are removed, we can sustain with a small increase,” he added.  


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