COLOMBO: Sri Lanka has temporarily shut its only oil refinery as part of efforts to manage dwindling foreign exchange reserves, the energy minister said on 16 November, triggering long queues at petrol stations, according to a report by Reuters.
The 51-year old Sapugaskanda Oil Refinery, which has a capacity of 50,000 barrels per day, is now closed, the minister, Udaya Gammanpila, said at the weekly Cabinet briefing.
“The refinery will be closed for about 50 days. Sri Lanka has very limited foreign exchange reserves at the moment and we need it more for essentials like food and medicine,” he said.
“The long lines at fuel stations will stop in a couple of days when the public realises there is no need to panic.”
Gammanpila said fuel imports would resume once the government was able to raise sufficient dollars but did not give details of a timeline.
Faced with rising inflation and dwindling reserves, the government is discussing a bailout for its economy, cabinet spokesman and Media Minister Dullas Allahaperuma told reporters.
“Cabinet members discussed at length the pros and cons of Sri Lanka going to the International Monetary Fund for support at Monday’s meeting but no final decision has been reached,” he said.
Sri Lanka is also attempting to negotiate a $500 million credit line with India to buy fuel and boost reserves, which dropped to $2.27 billion at the end of October. During the first nine months of 2021, Sri Lanka spent US$692 million on fuel imports, its highest import expenditure.
In August, President Gotabaya Rajapaksa declared a food emergency to contain soaring prices and tackle shortages of staples as the foreign exchange crisis deepened.
Consumers have been struggling with shortages of multiple essential items including cement, milk powder, rice and cooking gas over the last few weeks.
A decision by the government to ban chemical fertilizer imports, combined with bad weather, has also driven up vegetable and fruit prices, with food inflation hitting 12.8% in October.
The Central Bank of Sri Lanka has described as “completely unfounded” the speculation that expatriate Sri Lankans’ remittances to Sri Lanka will be forcibly converted into Sri Lankan Rupees.
“Expatriate Sri Lankans are free to hold such remittances in foreign currency form or convert such remittances into Sri Lankan rupees at their discretion. They will continue to enjoy the current privileges without any change whatsoever,” the Central Bank said in a statement.
Despite the Government claiming that they have enough funds, Samagi Jana Balawegaya (SJB) MP Patali Champika Ranawaka told the media that the Government is actually bankrupt and added that there will not be electricity in the near future.
“The government said that they would be constructing a Rs 600 billion oil refinery when they came to power, but today even the existing oil refinery is closed. The contract for LP gas will be expiring by February, they are not talking about that. Tenders for coal plants have also been halted, thanks to the weather we still have electricity. If the rain stops for 6 weeks, we will not have electricity anymore either,” said Ranawaka.
Thousands of people protested in Sri Lanka’s capital against deteriorating economic conditions amid fuel and other shortages.
The demonstrations in Colombo were led by the country’s main opposition political party, the United People’s Force, which has blamed the economic crisis on President Gotabaya Rajapaksa’s government.
The march came as Sri Lankan Parliament debated the national budget for 2022.
Protesters said Rajapaksa’s policies have led to foreign reserves dwindling, high food prices, and shortages of essentials such as milk powder, cooking gas and fuel.
Opposition supporters claimed the government’s decision to turn the country toward organic farming and to ban chemical fertilizer imports has threatened to create a food crisis.
Sri Lanka’s foreign reserves dwindled to just two months worth of imports in August and the local rupee currency depreciated 7.4% against the U.S. dollar in the first eight months of this year, according to the World Bank.
The government tried price controls and even declared a stage of emergency appointing an ex-military officer in charge of essential services but has so far failed to keep prices under control or stop hoarding.
According to a report in Nikkei Asia, Sri Lanka’s COVID-stricken economy is being likened to a ticking time bomb that could go off at any moment as foreign reserves plummet, the cost of living rises and the central bank carries on printing money.
The Central Bank of Sri Lanka printed over 130 billion rupees ($640 million) in October alone, but that is just the iceberg’s tip. From December 2019 to August 2021, Sri Lanka’s money supply increased by 2.8 trillion rupees — a massive 42%.
Much of the money went to pay the salaries of 1.2 million state sector employees, and to cover pensions that each year cost the government a thumping one trillion rupees. Unlike the private sector, which suffered salary cuts during the COVID-19 pandemic, state employees carried on at full pay despite the empty public coffers. Money was also printed with a view to keeping interest rates low.
Though it has generally been characterized as printing money, most of the increase in the overall money stock — or “broad money” as it is termed — since the end of 2019 is made up of government borrowings from the central bank and commercial banks.
Addressing a press conference earlier this month, Central Bank Governor Ajith Nivard Cabraal defended the decision to print money on the grounds that it was needed to maintain stability.
“If you read the monetary law, one of the responsibilities of the central bank is price stability as well as financial system stability,” he said. “Sometimes, in the interest of financial system stability — as well as economic and price stability — there can be instances where additional treasury bills could be issued to the government.”
Cabraal said similar money supply increases have been seen in about 120 countries “as a result of the pandemic.”
This view is not acceptable to W. A. Wijewardena, a former central bank deputy governor. He has warned that the 42% increase will pump severe inflation, possibly to over 40% in the next few years.
It was Wijewardena who used the economic time bomb analogy: “It is now ticking and can go off at any time,” he told Nikkei.
Meanwhile, Sri Lanka’s crippled tourism sector that is struggling to stay afloat is “very disappointed” in the statement made by Finance Minister Basil Rajapaksa during the debate on Budget 2022 and feels “hammered down” by the government especially at a time when some stimulus is needed to revive from the global health crisis, Hiran Cooray of the Sri Lanka Tourism Advisory Committee was quoted as saying in local media.
“I can say on behalf of the tourism industry, the industry people are very disappointed with the statement made by the Finance Minister, that when things got bad we came begging. There is a lot of hurt,” said the industry expert.
“The industry needs revival. The industry needs confidence. The industry needs boosting and encouragement. Not to be put down and trampled. That is what has happened,”
said Cooray.
Stressing the need to move forward, he called on industry stakeholders to explore means to stand up on their own and not expect support.
