Financial Times

In 2005, the government fuel subsidy was a record $220 million, more than 1% of Sri Lanka’s GDP, when the average spot market price of crude oil was $60 per barrel (pb). In 2006, with the average spot price at $70pb, what will be the amount of the fuel subsidy for the current year?

With the current upward trend in the crude oil spot market price, in 2006 the fuel bill will be a huge $2 billion. With this trend, the pertinent and the timely question is: can the government afford to endlessly subsidize fuel for political reasons? At $100pb can fuel still be subsidized?

Better use of tax revenue
Fuel is subsidized with the tax revenue or with foreign loans the country gets. Regardless of the sources of funding, it is needless to state that the continued subsidy that only keeps increasing to absorb the increases in the spot market price is an inefficient use of the funds. In an ideal situation, these funds must be put into better use for:

* Infrastructure development.

* Employment creation.

* Manpower development.

Misuse of the fuel subsidy
The purpose of the fuel subsidy is to provide some form of relief to the average person from the rising cost of living but regrettably there have been instances where this fuel subsidy was misused by profitable private enterprises.

In June there was an article in one of the business magazines that switching from LPG to subsidized kerosene by one of the leading building material manufacturing plants saved Rs 30 million annually. From a business stand point, cost cutting is good. But is this not a blatant misuse of the kerosene subsidy? The kerosene subsidy was introduced for the benefit of poor people and certainly not for multimillion export-oriented operations to rake in more profits abusing the fuel subsidy. There will be many more joining these ranks, if no proper controls are introduced urgently.

Alternatives to fuel subsidy
With the oil prices constantly increasing, Treasury Chief Dr. P. B. Jayasundara recently stated that the fuel subsidy would have to be increased further. This was confirmed by the Petroleum Ministry, saying that the fuel subsidy will have to be increased every time the world market price increases.

Indiscriminate increase of the fuel subsidy to reflect the spot market prices is not a sustainable or a viable solution and makes no economic sense at all. Perhaps from a political standpoint, such an endless subsidy may be justified.

But then this endless subsidy is said to have lead the CPC to the present crisis. The alternative is to increase the retail prices. This will be a “politically suicidal” decision as Sri Lankans already pay very high prices at the pump in comparison to other countries and per capita income.

The endless fuel subsidy is not a sustainable exercise. Subsidies do work but for a brief period as a measure to counter a crisis situation. We cannot be going from crisis to crisis perpetually. It only goes to reflect lack of vision and above all systemic deficiencies. Counter measures must be implemented without any further delay.

Procrastination is a costly error the country cannot face at this stage. Bring about policy changes; create awareness among the people; introduce price stabilization mechanism; introduce tax benefits; promote alternatives; introduce policies that will bring austerity measures. But the changes must start from the top and not the bottom!