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ECONOMYNEXT – Sri Lanka is considering hiking competitive tariffs offered to renewable power producers as they cannot complete projects at the previously competitively tendered rate after a currency crisis, Minister of Power and Energy Kanchana Wijesekera has said.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in 2022 after two year of money printing to suppress interest rates and a failed float botched with a forced dollar sale requirement to the central bank.

Meanwhile interest rates have also rocketed as attempts were made to stabilize the exchange rate after liquidity injections destroyed the credibility of the peg.

“We have a problem now,” Minister Wijesekera said. “Parties that came for tenders and put bids can no longer proceed on the basis of tenders.

“Due to the exchange rate and interest rates changing, in getting bank loans, or in importing the solar panels or equipment the cost has gone up.

“All those parties who got tenders have requested a change in tariff. We are in discussions at the moment with the advice of the Attorney General on how to do that.”

Feed in tariffs for rooftop solar had already been hiked, he said.

Sri Lanka has also seen some foreign investors who are ready to build renewable plants for state-run Ceylon Electricity Board at a dollar tariff, known as market-seeking FDIs. However most seem to want to build unsolicited plants without coming for competitive tenders.

The utility’s revenues are in rupees requiring a tariff hike when the central bank depreciates the rupee after mis-targeting rates.

The CEB is already exposed to dollar expenses through coal and fuel imports. It manages to keep costs down due to its fully owned large hydros which have been fully depreciated.

Forex shortages and currency crises are a problem associated with intermediate regime central banks also known as soft-pegs or ‘flexible’ exchange rates which are neither clean floats nor hard pegs.

Under a ‘flexible’ exchange rate, errors in mis-targeting rates are compensated by depreciation in a bid to maintain an artificially low policy rate for a longer period by targeting an inflation rate as high as 5 percent six percent, or twice the rate of stable central banks.

However both the currency collapse and the rate hike – higher than the one originally needed to maintain the credibility of the peg – eventually takes place. After two years of money printing to maintain a policy rate interest rates, market lending rates are close to 30 percent. (Colombo/Jan01/2023)

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