ECONOMYNEXT – Sri Lanka’s five major state-owned enterprises lost 931 billion rupees in the first four months of 2022, according to official data, the collapse of a soft peg due to aggressive open market operations by the central bank contributing most of the losses.
The Ceylon Petroleum Corporation lost 628 billion rupees, including 541 billion rupees of the spread stemming from a foreign exchange loss as a soft peg operated by the central bank collapsed after two years of money printing.
Foreign currency loans have also been taken out to purchase oil, when the central bank created currency shortages through aggressive open market operations during current and past currency crises.
Currency crises and currency shortages are a problem associated with loose pegs where monetary and exchange rate policies come into conflict.
Once a clean float or hard peg is adopted, currency shortages magically disappear.
The CPC also indirectly bears the losses of the Ceylon Electricity Board by giving fuel on credit and taking out loans to finance its own cash shortages due to delays by the Public Utilities Commission of Sri Lanka in granting it price increases.
Prices are being hastily raised as part of an IMF program. The CEB price was raised through an IMF program in 2012, before the currency was floated, but was later reversed when a Chinese-funded coal-fired power plant came online and an increase in prize was not granted despite several requests.
The Ministry of Finance implemented a pricing formula for the CPC under an IMF program in 2018 as a structural benchmark, as prices were directly under political control, but the CEB, which was under regulation, missed structural benchmarks and indicative targets.
“Ceylon Electricity Board (CEB) continued to post losses throughout the first half of 2019 (-0.5% of GDP), due to hydropower shortages, high generation costs and a lack of ‘adjustment in retail prices,’ said an IMF staff report in 2019 at the end. of the last program.
“The end-June and end-September ITs on CPC and CEB non-commercial bonds were
Sri Lanka renationalised state enterprises like SriLankan Airlines and Litro Gas under then President Mahinda Rajapaksa and his economic advisers who advocated state expansion and the next administration which critics say had fear of politics has not privatized a single entity.
Sri Lanka and Pakistan, which have the worst central banks in South Asia, have serious problems with state-owned enterprise losses, mainly due to currency depreciation.
In Sri Lanka, the classical economic principle of sound money was abandoned in favor of the mercantilism and monetary instability which became popular in Western academic circles following the Great Depression in general and until 1971 in particular. .
Dual-anchored conflicts, which did not exist in South Asia when it was in the sterling area under British rule, erupted under the Bretton Woods system after World War II, leading to currency shortages, trade and exchange controls.
Western nations emerged from the conflicting dual-anchor soft peg in 1971 (Japan, Germany, Singapore, Thailand, Hong Kong, retained very consistent pegs under Bretton Woods and after) with the collapse of Bretton Woods.
Soft pegs continue to be peddled and adopted in South Asia as part of “currency reform”, “monetary policy modernization” and “central bank independence”, according to critics.
Sri Lankan ‘economists’ favor currency depreciation based on a neo-mercantilist belief that undermining a sound monetary system to tip the scales in favor of exporters at the expense of their workers profiting from a lag in the wage catch-up, will make the country an export powerhouse, despite the policy creating industrial unrest and civil unrest for more than half a century.
“Gone are the days when most people in positions of authority viewed stable exchange rates as an advantage,” explained classical economist Ludwig von Mises. “The devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital.
“It is one of the methods of economic nationalism. Few people now want stable exchange rates for their own country.
“The most fatal results of inflation arise from the fact that the rise in prices and wages which it causes occurs at different times and in different extents for different kinds of commodities.
“Certain classes of prices and wages rise more rapidly and at a higher level than others. While inflation is ongoing, some people enjoy higher prices on the goods and services they sell, while the prices of the goods and services they buy have not yet risen at all or not in the same measure.
“These people profit by virtue of their privileged position. For them, inflation is good business. Their gains come from the losses of other sections of the population.
“Modern monetary theory has provided us with the irrefutable demonstration that this disproportion and non-simultaneity are inevitable characteristics of any change in the quantity of money and credit.”
In 2022, interest is not just in Sri Lanka. Strikes spread and incumbent leaders lose their jobs in Europe and elsewhere after the Federal Reserve, European Central Bank and Bank of England also printed money to “create jobs” in 2020 and 2021. (Colombo/July08/2022)