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No fuel fund or pricing formula?

18 Nov 2021

  • Energy Ministry says time is not right for a fund 
  • Notes no discussions held on any formula
  • Central Bank, Ali Sabry calls for a pricing mechanism for fuel
By Shenal Fernando The establishment of a Fuel Price Stabilisation Fund (FPSF) to cushion the impacts of fluctuating global oil prices on the general public, is expected to be delayed further while there have been no discussions about introducing a fuel pricing mechanism as well, The Morning Business learns.  Ministry of Energy Secretary K.D.R. Olga, speaking to us yesterday (17), claimed that it is not practical to establish the FPSF right now due to the increasing fuel prices in the world market. Explaining further, she provided: “A Fuel Price Stabilisation Fund should be established in a market where fuel prices are falling and not in a market where prices are increasing.” She also stated that no discussions have been held within the Ministry of Energy with regard to the implementation of a fuel pricing mechanism as of right now. Her comments come amidst calls to implement a fuel pricing mechanism from the Central Bank of Sri Lanka (CBSL) and the Ministry of Justice.  Minister of Justice Ali Sabry, speaking in Parliament during the debate on the second reading of the Budget, on Tuesday (16), claimed that he is in agreement with the recent proposal put forward by the CBSL to reintroduce a fuel pricing formula and requested Finance Minister Basil Rajapaksa and the Government to consider the proposal. Explaining further, Sabry claimed that he believes Sri Lanka must once again implement a system which allows the price of fuel to fluctuate in accordance with fluctuations in world market prices. “When paying tax ultimately, it is paid from the money of all the people including the poor. Therefore, it is unreasonable to utilise public funds to cover the petrol and diesel of those who can afford to use a petrol or diesel car. That subsidiary is not suitable,” added Sabry. On 10 November, the CBSL released a report titled “Recent Economic Developments: Highlights of 2021 and Prospects for 2022” where they proposed that considering the volatility observed in global energy market prices, the adoption of a suitable cost reflective pricing mechanism for fuel was appropriate. Moreover, the CBSL claimed that such a mechanism will be vital to ensure the financial viability of Ceylon Petroleum Corporation (CPC) and thereby the stability of the banking sector, considering the current external environment. The CBSL further added that such a pricing mechanism would also “improve transparency and thereby improve the general public’s acceptance of much-needed regular price revisions in relation to these imported products”. It should also be noted that the current Government, who were the Opposition party during the regime headed by former President Maithripala Sirisena, continuously criticised the fuel price formula that was introduced by late Minister of Finance Mangala Samaraweera in May 2018. Though the current Government did not officially abolish the formula, they publicly said they will not be implementing it as soon as they came into power. Speaking to The Morning Business last week, Minister of Energy Udaya Gammanpila stated that the Ministry of Energy is yet to reach a final decision with regard to this matter. Nevertheless, according to him, the FPSF is a more suitable alternative for CPC to follow.  “The Central Bank can only make recommendations and reports; the ultimate decision is with the Government. I have proposed the Fuel Price Stabilisation Fund from last year, as it is more suitable for a country like Sri Lanka. As of now, we have not taken any decision, but the final decision will be decided by the Cabinet,” claimed Gammanpila. Despite repeated attempts by us to contact the Ministry of Finance and Treasury Secretary S.R. Attygalle, all such attempts proved futile. The FPSF was introduced in March 2020 with an initial capital of Rs. 47.5 billion provided by the CBSL through treasury bills. During 2020, when world fuel prices were low, an import tax surcharge was imposed on fuel to maintain the domestic prices and the gains which arose from such non-adjustment of domestic fuel prices were transmitted to the FPSF. This tax surcharge was removed when fuel prices started going up during the latter half of 2020. Speaking to The Morning last December, Attygalle claimed: “I cannot remember the exact day we took this duty out. When the global oil prices went up again, we discontinued this charge.” According to Attygalle, the fund had raised only about Rs. 50-60 billion within six months, which was significantly less than the initial intention of the Government to collect Rs. 200 billion under the fund within a period of six months. “There is no money in the fund at the moment. We paid some fuel dues to the Central Bank of Sri Lanka. We lent the rest to the Ceylon Electricity Board (CEB) to settle their outstanding payments to CPC. It is yet to be recovered,” he added. According to the CBSL report, increased global demand and supply conditions led to the increase of global crude oil prices. Consequently, the average Brent prices increased to $ 67.8 per barrel during the nine months ending September, which represents a 58.3% Year-on-Year (YoY) increase compared to the corresponding period in 2020. Similarly, the average price of crude oil imported by the CPC during the first nine months of 2021 has also increased to $ 66.96 per barrel, which represents a YoY increase of 47.8% when compared to the average import price of $ 45.31 recorded over the corresponding period of 2020.    During the month of October, global crude oil increased further with Brent prices reaching a three-year high of $ 86.7 on 25 October, before settling at around $ 82 as of yesterday.


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