Energy price hike on the cards; inflation persists

Further hikes in fuel and electricity prices are expected in the coming months as a result of government’s attempt to curb losses incurred by stateowned Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB), thereby creating inflationary pressures, a report said.

It was not long ago the Central Bank Governor called for energy price revisions to bring CPC & CEB to at least to break even level by end 2013 in order to ensure viability and to eliminate the imbalances created in the banking sector.

CT Smith Stockbrokers, a leading brokerage in the country with a predominantly foreign clientele noted in their report that the Central Bank’s focus to spur growth amid supply constraints and further monetary easing will push point-to-point headline inflation up between 8 to 10% in 2013.

 The report further pointed the year 2013 is likely to close at an inflation of 9.7 percent with annual average inflation expected at 8.9 percent.

“We expect high pressure on inflation to continue into early 2013E, largely led by supply side shocks in the food category, however to reduce subsequently assuming weather conditions normalize. Meanwhile increased pressure is anticipated from the non-food category, especially amidst potential energy and fuel price hikes, also expected in 2013E,” CT Smith noted.

In 2011, the CPC & CEB made losses of Rs.94 billion and Rs.25.5 billion jacking up the combined loss to a staggering Rs.119.5 billion from a combined loss of Rs.22 billion the year before.

Meanwhile the Treasury Secretary Dr. P.B Jayasundara in a recent press conference ruled out the possibility of adopting a full market reflective pricing formula for energy which according to him would lead to market uncertainty and fluctuations, particularly related to industries.

However, in spite of significant price revisions carried out last year, credit to public corporations increased by Rs.63 billion, bulk of it swallowed by CPC & CEB, to end the year with a total outstanding credit of Rs.261 billion in 2012.

As a result, a hike in transportation costs is a natural ramification. Drought-free weather witnessed during greater part of 2012, would however lead to reduced expenditure on higher priced diesel fuels for thermal power generation amid increased hydro power generation, thus reducing the burden on the CPC and CEB.

“If someone wants to assign a financial value for the rain we received during the 4Q2012 it was as much as US $ 2 billion, if otherwise would have been spent on importing crude oil to generate thermal power,” said Dr. Jayasundera adding that the country had spent US $ 5.5 billion for importation of oil out of the total import bill of US $ 18.9 billion for last year.

Meanwhile, imported inflation though still significant is expected to pose less pressure in 2013E Vs. 2012, as the Sri Lankan Rupee is expected to depreciate at a more moderate pace of 2-3% in 2013E (Vs. 12% in 2012), amidst measures taken by the government to strengthen the balance of payments.

“Demand- pull inflation is relatively of less concern in the near term, as economic growth is forecast to only recover to 7.2% in 2013E (up from 6.3% in 2012E, but down from over 8.0% during 2010-2011), and the economy is not showing any signs of overheating,” C T Smith said while maintaining expectations of low wage increases, especially in the public sector.