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Sri Lanka should cut losses, bank credit to state energy utilities: CB Governor
02 Jan, 2013 19:27:18
Jan 02, 2013 (LBO) - Sri Lanka should cut losses and bank credit taken by Ceylon Petroleum Corporation and Ceylon Electricity Board with better pricing in 2012, Central Bank Governor Nivard Cabraal said.
Sri Lanka does not have a mechanism to regularly adjust important energy prices, which are based mostly on imported petroleum and pass through cost to the economy quickly, due to state intervention in pricing.

A surge in unproductive credit to state energy utilities as a drought hit hydro power generation amid rising petroleum prices, worsened a credit bubble from mid 2011 eventually triggering a balance of payments crisis.

In early 2012 energy prices were raised as part of a package of measures to recover from the balance of payments crisis.

"In spite of the significant price revision however, credit to public corporations continued to increase particularly to the two major corporations the CEB and the CPC," Governor Nivard Cabraal said.

"I believe that is an area the government as well as the policymakers as far as the CEB and CPC are concerned, will have to look at during the course of 2013."

Analysts have identified sudden surges in credit to state enterprises as a key factor that can de-stablize the economy in the future, as it had done repeatedly in the past.

The balance of payments crisis eventually deprecated the currency about 10 percent and pushed inflation up to 9.2 percent in 2012.

Currency depreciation not only increases the price of energy itself, but also destroys the real value of current salaries and lifetime financial savings.

Countries that market price energy daily have very low inflation of around 2 to 3 percent a year. Sri Lanka's experienced some of the lowest inflation in its history from 2001 to 2003 when fuel prices were adjusted monthly.

But when an administration in power tries to adjust prices, sections of the elected rulers in opposition tend to oppose the move.

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