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SL’s Petroleum Costs and Profits Shrink amid New Market Entrants and Economic Shifts

By: Staff Writer

November 04, Colombo (LNW): In the first half of 2024, Sri Lanka’s state-owned Ceylon Petroleum Corporation (CPC) saw a significant reduction in its petroleum import costs, dropping to USD 1.235 billion from USD 1.38 billion in the same period of 2023. This reduction, as reported by the Finance Ministry, stemmed primarily from lower import volumes, influenced by the entrance of new competitors in the market, despite rising international crude oil prices.

The drop in import costs positively impacted CPC’s cost of sales, which decreased by 17.2% to LKR 467.7 billion, compared to LKR 564.6 billion in the first six months of 2023. However, CPC’s turnover simultaneously experienced a more substantial decline of 20.1%, dropping from LKR 681.5 billion in the first half of 2023 to LKR 544.3 billion in 2024.

This reduction in revenue significantly affected the company’s profitability, with net profits falling sharply by 70.2% to LKR 20.7 billion, compared to LKR 69.5 billion in the previous year. The lower profitability was attributed to increased competition and lower sales, despite the overall decrease in the cost of imports.

Furthermore, CPC’s financial obligations improved over the same period. The organization has now cleared all liabilities to Sri Lanka’s Bank of Ceylon and People’s Bank, thanks to a government initiative that took on CPC’s dollar-denominated debts from state banks. The debt owed to the National Iranian Oil Company, which had stood at USD 230.9 million at the end of 2023, also decreased to USD 191 million by the end of June 2024.

The Finance Ministry report highlighted that CPC’s prior debt was largely due to dollar loans taken from state banks to cover supplier credits during times of currency shortages. These shortages often arose from the central bank’s policy of flexible inflation targeting, which involved printing money to encourage inflation and stimulate economic growth.

However, when money was created to finance imports, it led to a widening current account deficit and subsequent currency devaluations, causing CPC to incur substantial losses.

The economic challenges CPC faced were not new. During past currency crises, including one tied to the Iranian debt two decades ago, CPC had relied on suppliers’ credit.

Analysts noted that this pattern of incurring debt from money printing has continued to burden Sri Lanka’s economy. Additionally, the central bank’s approach of maintaining low interest rates through open market operations had similar consequences, contributing to the country’s financial instability.

After Sri Lanka’s civil war, the government pursued heavy debt accumulation, enacting the Active Liability Management Law to manage its debts actively. This approach, combined with unsustainable interest rate policies, eventually pushed Sri Lanka towards default.

However, since the last quarter of 2022, Sri Lanka’s central bank has maintained relative monetary stability, which has been advantageous for state energy firms like CPC. This stability, along with a gradual currency appreciation, has somewhat mitigated the impact of global oil price surges on CPC’s operations.

These changes have allowed CPC to reduce debts and manage costs better, even as profits and revenues shrink amid heightened market competition.

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