ECONOMYNEXT – Sri Lanka’s government has taken over loans of 2,435 billion US dollars taken from state banks by the Ceylon Petroleum Corporation, which have been converted to long term loans, a Finance Ministry report showed.
In 2024, tax payers have taken over 788.6 billion US dollars in state bank loans, the Auditor General’s report on Treasury accounts show.
A 410.4 billion rupee equivalent forex credit from the Bank of Ceylon to the CPC and default interest of 73.6 billion US dollars had been converted to a US dollar term loan.
A 136.6 billion rupee equivalent forex loan and default interest of 30.4 billion rupees had been coverted to 224.3 billion equivalent dollar term loan.
Another 224.3 billion rupee equivalent US dollar loan and default interest of 38.2 billion rupees had been converted to rupee treasury bonds.
By end 2024, the term loan to the Bank of Ceylon was 1,582 million US dollars, and term loans to the People’s Bank was 546 million dollars. Treasury bonds given to the People’s Bank was 262.58 billion US dollar.
The CPC has is forced take loans from suppliers whenever forex shortages emerge after macroeconomists cut rates with inflationary open market operations under ‘central bank independence’.
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Suppliers’ credit are taken even when the CPC market prices fuel prices as happened in 2018 after rate cuts trigger forex shortages. The supplier’s credits are then settled with dollar borrowings form state banks.
State banks sometimes take foreign loans and engage in dollar rupee swaps to manage the crisis.
Suppliers credit (or loans) taken as forex shortages emerge further widens the external current account deficit. Macroeconomists then blame forex shortage on the current account deficit.
The currency collapse that follows the inflationary rate cut then trigger large losses in the CPC despite fuel being market priced.
Suppliers credit and state bank loans have also been used to cover losses in some years, after failing to market price fuel as the currency collapses or when global prices go up from commodity bubbles fired by Fed rate cuts.
Analysts have pointed out that soaring dollar debt of CPC at each currency crisis from rate cuts was a microcosm of foreign borrowings that took place through Active Liability Management Act to the central government, instead of settling loans after maintaining monetary stability with deflationary policy.
In 2017 and 2019, when deflationary policy was followed, some of the supplier credit linked loans were settled.
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Forex shortages emerge when rates are cut by an age-of-inflation reserve collecting banks on statistical formulae (historical inflation, potential output under flexible inflation targeting), rejecting economics, primarily the specie flow mechanism described by David Hume and later elaborated by other classical economists including David Ricardo and James Mill. (Colombo/June26/2025)
