Necessary but unpopular decisions

The Government’s decision to increase fuel prices last week led to a furore among the pandemic-stricken people who were awaiting some form of relief, not price hikes. In Sri Lanka, regardless of the amount, any form of price hike receives criticism under normal circumstances, and the recent fuel price hike coming during a pandemic, intensified that criticism.

Fuel price hikes, especially, receive more opposition than other goods, as the price of fuel decides the price of a large number of other goods and services, especially food and transport, and in this context, the public’s opposition is reasonable. But, the real question is whether the decision to increase fuel prices was reasonable and if crude oil prices in the world market support that decision.

During the first few months of this year, crude oil prices in the world market have been on an upward trajectory.

One may feel that crude oil prices going up does not justify fuel price hikes in the domestic market. Well, it is true that one of the responsibilities of a government is to see to it that the domestic prices (of a certain good or service) are minimally affected by the price fluctuations in the world market. However, during a pandemic that calls for more funds for the health sector, while a majority of money-making businesses have to come to a halt, there is a certain limit to what a government can afford to give in the form of subsidies and ignore the prices of goods and services in the world market.

For far too long, decisions pertaining to Sri Lanka’s fuel prices were largely driven by political factors and opinions of a handful of persons; when, in reality, those decisions should have been based on economic factors and national interests. Slashing prices when an election approaches and increasing prices post-election or when there is no election in sight, is Sri Lanka’s experience.

Did these short-sighted, politically driven decisions help the country? The answer varies depending on who you ask. The general public may approve of it, to a great extent. However, if you ask an economist or even an individual with a general understanding of how the economic machinery works, the answer would be that it has caused severe damage to the country’s overall economy, which, in turn, indirectly affects the public’s economy, even though it is easily overlooked by most people. These decisions, aimed at comforting the public for a short period of time, resulted in the Ceylon Petroleum Corporation (CEYPETCO) suffering mammoth losses annually – except in 2020 when it made profits thanks to the lockdown-led restrictions on travel, which significantly reduced fuel demand locally and drastically drove down oil prices globally. However, in a context where the global oil prices are expected to keep climbing at least until the latter part of 2022, suffering losses to keep oil prices down is absolutely not a long-term, healthy decision the Government can afford to continue.

When we look at Sri Lanka’s recent past, it is evident that Sri Lanka’s economic management, or various approaches adopted by governments and authorities to keep the economy stable, always received more criticism than appreciation. It is, however, a completely understandable reaction, given the ups and downs of the overall economy in the recent past and the extent to which the general public benefit from the “progresses” shown in Central Bank reports and official figures. Speaking of which, there is a discrepancy between what the general public considers to be economic progress and what the economists think of as the same. This is quite a normal phenomenon, as economists have to delve deep into statistics and the larger economy for their conclusions. However, what Sri Lanka needs now are not populist policies that will hurt the economy in the long run, but pragmatic and far-sighted decisions that may hurt public sentiment and government popularity in the short term. This fuel price increase is one such decision, and therefore, should be welcomed.