Unsentimental economic pragmatism or insensitive financial imposition?

17 Jun 2021

Unsentimental economic pragmatism or insensitive financial imposition?

17 Jun 2021

BY Sumudu Chamara The recent increase in the retail fuel prices has left many people, who are already struggling from the health and economic effects of the pandemic as well as the ever increasing cost of living and ever stagnant incomes, worried about a further increase in the prices of all day to day goods and services. The Government decided to increase fuel prices with effect from midnight on 11 June, begetting criticism from many parties. While most of them expressed strong opposition to the fuel price hike, the possible price hikes of other goods, especially food, was a bigger concern. While the prices of Octane 92 Petrol was increased by Rs. 20 (the new price of a litre is Rs. 157), the price of Octane 95 Petrol was increased by Rs. 23 (the new price of a litre is Rs. 184). Auto Diesel and Super Diesel were increased by Rs. 7 and Rs. 12, increasing their prices to Rs. 111 a litre and Rs. 144 a litre, respectively. The price of kerosene was also increased by Rs. 7 to Rs. 77 a litre. The Morning spoke to a few economic experts and energy sector stakeholders to obtain their views on this controversial decision by the Government. Was it an economically rational and tough decision which had to be made for the sake of the financial health of the oil importer Ceylon Petroleum Corporation (CPC), or should the plans for a price hike have been postponed or cancelled altogether in consideration of the difficulties faced by the general public under the current pandemic? World market vs. domestic fuel prices According to the Government, the recent fuel price hike was a well planned decision, which was based on the fuel prices in the world market as well as the Central Bank of Sri Lanka’s (CBSL) observations. Explaining to The Morning how the fuel prices in the world market affected Sri Lanka’s decision, Money and Capital Market and State Enterprise Reforms State Minister, Ajith Nivard Cabraal said: “We have seen the fuel prices fluctuating worldwide from around $ 40 a barrel in January to around $ 70 a barrel, now. Therefore, there has been a marked increase in the prices and when this happens, it is definitely a constraint in carrying out the normal activities in a country without making any adjustments to the fuel prices. That is what has happened, and we have to make such adjustments. Otherwise, the Ceylon Petroleum Corporation (CPC) would be incurring huge losses over a continuous period of time. This year alone, the CPC has incurred around Rs. 45 billion in losses. If that loss had been allowed to continue further, it would have been felt by the banks also as they have been extending credit to the CPC. So, in order to avert a crisis, we had to take this decision, which would also ensure that the pricing levels of the CPC were in keeping with the cost incurred. Now that has taken place and therefore, I think that we will be quite stable as far the economy is concerned, in the future.” However, economist and Samagi Jana Balawegaya (SJB) Parliamentarian, Dr. Harsha de Silva, said that fuel price fluctuations in the world are inevitable; however, it is the Government’s duty to control it, and give the people the benefit of decreasing fuel prices, in the same way that the Government charges more when the prices in the world market increase. He said that the price increases in the world market will continue to rise, emphasising the importance of more in-depth measures, even though increasing the domestic fuel prices is the most obvious solution. He added: “The question is, if there was a pricing formula in place, what would the price hike have been? When the world market prices came down drastically, the retail prices should have dropped. But this did not take place, and the Government raked in all the additional revenue they could. For instance, it is interesting to note that even when the price of fuel dropped globally, the CPC was making losses. This whole thing needs to be looked at in that context. The politicians are saying that the CPC is making a loss and therefore it is borrowing money from the Bank of Ceylon and the People’s Bank, and it owes these two banks billions of rupees.” When contacted by The Morning, economist and Chairman of think tank Advocata Institute, Murtaza Jafferjee said that even after the fuel price hike, Sri Lanka still suffers losses as far as diesel is concerned, while making a very small profit on petrol. He explained: “According to my estimates, the price of diesel which is priced at Rs. 111 is still a Rs. 12.5 loss, and the actual price should be closer to Rs. 125. The cost of imported diesel, after adding all the basic costs and taxes, is around Rs. 125 and we are selling it at Rs. 111, and that is how we sustain losses. In the case of petrol, the landed cost is similar to diesel. Other basic costs such as distribution and storage costs are also similar to those of diesel. The taxation on petrol is closer to Rs. 40, and at Rs. 137, there is a small profit of about Rs. 4. Therefore, the thinking is that there is a profit as far as petrol is concerned which can be used to subsidise the loss of diesel. But the diesel consumption is significantly higher than petrol consumption and a Rs. 4 profit is not going to be able to offset the loss on diesel.” He added that with the challenges that Sri Lanka is facing with regard to debt servicing and a large balance of payment deficit, Sri Lanka’s currency has also been depreciating, and the cost of importing oil has therefore gone up. Meanwhile, Energy Minister Udaya Gammanpila, said that the fuel price hike was not abrupt and that the Government had been deliberating on it for months. He explained how the Government had arrived at a decision to increase the fuel prices. “In the middle of our deliberations, the CBSL, being the economic advisor of the Government, sent us an advisory note advising that unless the Government increases fuel prices, there will be irreversible repercussions such as the drastic depreciation of foreign reserves, the escalation of the exchange rate when compared to the US Dollar and also the collapse of the country’s banking system since the CPC is in debt to two State banks, amounting to $ 3 billion. Taking these factors into account, the CBSL advised the Government to increase the fuel prices with immediate effect.” “We then compared the impact of increasing diesel prices by merely 6% and the impact of allowing the Rupee to further depreciate by maintaining the old prices. We realised that if the US Dollar appreciates against the Rupee, the prices of every single imported commodity including medicines, chemicals and raw materials for various industries will increase, resulting in a drastic impact on the cost of living. However, increasing the diesel prices by just 6%, would not cause the same impact on the cost of living and also on competitive export industries. Therefore, we took into consideration the advice given by the CBSL, and accumulated the losses of the relevant institutions, and mainly the prevailing situation concerning the country’s foreign currency reserves. In fact, Sri Lanka has foreign reserves only to cover the cost of imports for the next three months, and it is an extremely alarming low level according to international standards. Therefore, reluctantly, we had to increase the fuel prices.” When queried as to what factors were taken into account when increasing the fuel prices, Cabraal said: “We have taken many factors into account to ensure that the CPC is viable and that the banks that have extended credit to the CPC are also viable, so that there is no monetary disturbance in the country. In fact, the CBSL itself has advised the Government that this price revision must take place. The CBSL warned that if this measure was not implemented, there could be a deep destabilisation of the economy as well. Therefore, the Government heeded this advice and the Government has made this adjustment.” “If one looks at the prices in the South Asian region, one will find that Sri Lanka’s prices are not exorbitant. In fact, the price of diesel in India was $ 1.23, whereas in Sri Lanka, it is just $ 0.56. In Bangladesh, it is $ 0.77 and in Pakistan, it is $ 0.71. Therefore, one can see that the prices in Sri Lanka are actually much lower than those of other countries in the South Asian region. Therefore, in a context when their per capita income is half of Sri Lanka’s per capita income, one can see that Sri Lanka is still maintaining a very fair price as far as the diesel and petrol prices are concerned. So, I think that we have not been unreasonable and that our price increase is not exorbitant, and also that we should make these adjustments in order to ensure that the economy becomes stable for the future as well.” Long-term measures Both Cabraal and Gammanpila explained that the fuel price hike is a short-term measure, and that the Government is planning to take long-term measures to manage the fuel prices in a smoother manner. Explaining further, Gammanpila added: “At this moment, since we have not taken the necessary steps in the past, we have no other choice. However, this is merely a short-term solution, and our mid-term solution is to establish a new oil refinery with a daily capacity of 100,000 barrels and the modernisation of the existing refinery facilities. With that, we will be able to refine our petroleum product requirement locally, thereby saving approximately $ 300 million annually. Our long-term solution is to explore and exploit our gas and petroleum resources which are hidden in the deep sea areas. Even though the booming petroleum market is a huge burden to us at this moment, if we become a producer of petroleum products, Sri Lanka would benefit from the said market, and it will be great news because it would certainly increase the country’s income. Therefore, the long-term solution would be to explore and exploit our gas and oil resources. With a plan, we are working on making it a reality, even though we had to increase fuel prices because we did not have any other choice at the time.” He invited those who criticize the price hike to put forward any alternative solutions they may have for the Government, adding that the Government is humble enough to implement any workable solution. Speaking of the long term measures, Cabraal said: “Our intention is to maintain the same prices as much as possible. In case there is some reduction in the prices, what we intend to do is to credit the difference into a price stabilisation fund, so that that would be the buffer we could use in the future in case the prices go up yet again. The idea is to ensure that the prices remain as stable as possible so that we can maintain these prices for a reasonably long period of time so that there is stability in the entire economy. That is a tough call, but I think that through the method we have proposed, i.e. the price stabilisation fund, we can achieve it unless there is a huge fluctuation in the world market price. We hope that the price fluctuations, if any, will be limited, and in that case, Sri Lanka would be well on the way to ensuring stabilised prices for fuel.” Fuel price formula vs. fuel price stabilisation fund Even though the Government says that the fuel price hike was necessary and that the increases were minimal, SJB MP Eran Wickramaratne claimed that had the fuel price formula introduced by the United National Front-led Government still been in place, even though increasing fuel prices was inevitable, the increase would have been lesser. He also said that the present Government, rejecting that formula, was an unwise decision. “If one had a transparent price formula, the price hike would be more reasonable and minimal. But the current Government rejected the formula and opted to establish a fuel price stabilisation fund, which now seems to have been exhausted. The problem with funds is that they are not as transparent as formulas,” he added. Speaking further of the formula, he explained: “Fuel is important and the country’s fuel prices must always be in line with the international prices. That is why our Government came up with a fuel price formula, which had several variables including the international prices, evaporation costs, exchange rates, costs such as handling costs, processing costs, transport costs and administrative costs and taxes. The positive side of a price formula is that people are conscious about international prices, it is more transparent and one is moving more and more into scientific management, so that one can minimise wastage. For example, if one is over employing, then one can see it in the formula, and then all one has to do is to take some measures to reduce it. If transportation costs or storage costs or something else is going out of line, one can see that as well. One cannot hide it. After a while, people become aware of it, and there will be pressure on the Government and institutions to be better managed. The private sector would certainly have taken those decisions, but in the Government those decisions do not take place automatically. So, that was the logic behind the fuel price formula. Governments always impose tax, but the people would have had the chance to know as to how much the tax is. However, while the Government is still taking taxes, the consumers would have also benefited. Currently, consumers receive no benefit at all. Fuel prices remain very high.” Wickramaratne also noted that Sri Lanka should not depend on specific politicians and their actions, and that measures such as increasing fuel prices should not be determined by politicians but by a transparent system. “Sri Lanka must move out of this mentality, and adopt scientific economic management,” he stressed. Speaking of the repercussions of the recent fuel price hike, Wickramaratne explained that since the recent increase in fuel prices came about suddenly, as the people are facing a very grave danger due to the loss of jobs and sources of income, the people were affected by it more than they would have been before. He opined that when the fuel prices go up in a context where the people have lost their income and the cost of living has risen, it is a major issue. Claiming that the fuel price hike may have many repercussions, Wickramaratne noted that since fuel prices are directly linked to the people’s day-to-day lives and expenses, especially transport and food, it might cause further inflation, especially food inflation. Consumers Meanwhile, the Movement for the Protection of Public Rights Convenor Asela Sampath was of the view that the Government should have paid attention to all factors that cause the country to suffer losses despite fuel price hikes in line with the world market prices. He added that this situation may lead to malnutrition, as the people are likely to have to cut down on their food intake due to increased prices. Sampath added: “The main topic that is being discussed in the country is the increase of the prices of fuel, which is one of the most essential items. Even though the Government keeps saying various things as reasons for the fuel price hike, the people are in a difficult situation. Domestic fuel prices were increased even before, when the fuel prices in the world market rose. However, a bigger public opposition has been created now, because this is a difficult time for the public. The Government decided to increase the fuel prices, claiming to cover losses, at a time when the people have become helpless due to the Covid-19 pandemic which has continued for over a year, and also the travel restrictions, lockdowns and the disruption of their occupations and businesses that has resulted. The fuel price hike has severely affected the people. For example, by now, the prices of bakery products have increased. In addition, the prices of essential goods have also increased in an unjustifiable manner. The Government gives Rs. 5,000 and Rs. 1,000, and then they increase fuel prices and import vehicles. There are plans to allow a gas price hike by around Rs. 4,000. Wheat flour prices were increased. The prices of everything increased during this process. When wheat flour is increased by Rs. 3.50, all food items made out of wheat flour become expensive. Once the travel restrictions are lifted, the prices of food sold at restaurants will certainly increase, which will affect the people more than before.” He also said that the fuel allowances given to public officials and politicians should be stopped, and that spending taxpayers’ money to give huge allowances to the said parties is unfair on the public. He also claimed that those who receive fuel allowances from the Government must make a commitment by refusing to accept such allowances for at least a month. “When the politicians enjoy all the luxuries while the people are in destitution, it shows the massive gap in the society,” Sampath elaborated. Speaking of the losses suffered by the country’s fuel industry, Sampath added: “The CPC suffers losses because it has more employees than it actually needs and they receive huge salaries and other payments. Those are unnecessary expenses that need to be stopped. If both the CPC and the Indian Oil Company (IOC) implement the same price hike, why does the IOC make a profit while the CPC suffers losses? The answer is that the IOC does not recruit employees unnecessarily. Sri Lanka must keep the most essential employees at the CPC and transfer the rest to where there is a lack of employees.” Even though the Government defended its decision, and stressed that it was a temporary measure, there is a major possibility that the prices of a large number of goods may increase in the coming few weeks. In fact, bus owners and restaurant owners have already raised their concerns in this regard, and have demanded price hikes. It is understandable that the Government has to amend the prices of goods and services in the domestic market in line with the prices in the world market. Whether this was the right time to do so is another matter altogether which must be looked at both from an economic and humane point of view.

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Unsentimental economic pragmatism or insensitive financial imposition?

Unsentimental economic pragmatism or insensitive financial imposition?

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