Sept 15: State-run petroleum utility Ceylon Petroleum Corporation (CPC) is covering overdue government accounts with an Iranian credit, but its finances are too fragile to cut prices, a top official said.

Iran has given the CPC a rolling credit to cover four months of imports interest free and another three months with interest, which the utility started using from the first quarter of 2008.

CPC chairman Ashantha de Mel said his firm had used "about 500 million dollars" of the credit so far, but unpaid government accounts was eating up the credit.

De Mel has said earlier that he preferred to use only the four months of interest free credit. Sri Lanka imports crude from Iran.

De Mel said a large debtor was the state run Ceylon Electricity Board (CEB) to which diesel was sold at 85 rupees a litre (diesel is retailed to other customers at 110 rupees a litre) but the power utility does not pay on time.

The CPC has come under pressure to cut prices, especially in petrol, as global prices plummeted. Petrol is now retailed in Sri Lanka at more than double the Singapore price benchmark price, according to Central Bank data.

He says CPC has about 50 billion rupees (460 million US dollars) of unpaid dues.

"How can we reduce prices in such a situation?" he asked. "CEB has said it had lost 42 billion rupees. Whether it is CPC or CEB these are all losses to the government."

De Mel says CPC imports oil at a monthly average price and spot prices have little immediate impact on its import costs.

De Mel has pushed hard to raise prices to avoid large losses at CPC.

Economists had warned that losses at utilities which are then financed with bank loans can put pressure on the exchange rate and also cause high inflation, if accommodated by the central bank, through the banking system.

Sri Lanka’s politicians under price diesel, kerosene and power prices as a vote-buying tactic and frequently finances such losses with tax breaks which are then topped up with central bank credit (printed money) driving inflation to very high levels.

Sri Lanka’s inflation had ranged about 20 percent over the past three years. After hitting 29.9 percent in April it has started to come down amidst tight monetary policy from the central bank, which is now refusing to print money to cover fiscal shortfalls.

High inflation hurts the poorest sections of society that use the least amount of energy, most and also destroy the real value of savings of old people, because interest rates in the country are lower than inflation.

De Mel said CPC had made a profit of about 1.7 billion rupees in the first six months of the year with some help from hedging contracts but the third quarter would have large losses, which he did not quantify.

He says some of the third quarter losses would have to be recovered in the fourth quarter.

Lanka IOC, a unit of Indian Oil Corporation which has a third share of Sri Lanka’s market, reported a profit of 1,023 million rupees for the quarter ending June.

LIOC said it had run down stocks, cut stock holding costs and interest by repaying debt and avoided buying at peak prices to show a profit.

Lanka IOC also runs a lean business, while CPC is burdened with thousands of excess employees stuffed into the utility by successive governments.

(Lankapage)