ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will issue fuel on a guaranteed quota to companies that can pay in US dollars, Power and Energy Minister Kanchana Wijesekera said as the country grapples with the worst currency crisis in the history of its soft-pegged central bank.

Sri Lanka is facing severe fuel shortages (cannot convert rupees to dollars) with after the central bank printed money, imposed a surrender requirement and smashed the credibility of a pegged exchange rate regime now called a flexible exchange rate.

“Any company/industry that can pay in US dollars can open a consumer account at CPC to obtain a weekly guaranteed quota,” Energy Minister Kanchana Wijesekera said in a message.

“The need to pay a month in advance; fuel will be issued on a daily or weekly basis from the 12th.”

Forex shortages are a problem associated with soft-pegged central bank which artificially manipulates interest rates with liquidity injections and are not found in clean floating regimes or currency boards (credible pegs).

When the credibility of the peg is broken wealth cannot be transferred from the credit system linked to the rupee monetary base to dollar system linked to the US Fed.

However by not converting the US dollar in the first place and keeping wealth in US dollars and settling transactions in the foreign currency (dollarization), the ability to transfer wealth can be maintained.

Analysts had warned that the central bank, which was set up in 1950 by abolishing a credible peg can allow economic activities to continue by allowing parallel dollarization.

However legislators in the country have given the agency extensive powers to control the people through exchange controls and legal tender laws, which can be used block US dollar transactions, preventing normal economic activity from resuming. (Colombo/July04/2022)