Govt. passing on oil price hikes to consumers

Today almost every country in the world is affected by the continued increase in crude oil prices. Two weeks ago prices in Sri Lanka increased by Rs 5 per litre for petrol and Rs 4 for diesel and Rs 16 for kerosene. This increase could set off a chain reaction of increases in prices of goods and services.

The increase would however only have a one-off impact on inflation but will be regressive, as it would affect the poor and affect the disposable income of the middle-income class.

This latest increase (No 6 so far this year) is going against the very basis of the Mahinda Chinthana pro poor strategy. Passing the increase in global oil prices to the user without subsidizing the CPC is a good move since it would not have a lasting negative effect on the economy. Also by providing subsidized oil to all and sundry also does not make sense because the man who drives a Benz and the man who rides a motor cycle have to pay the same price for their petrol.

So somebody has to pay for these increases. In the past the government took most of it. However today because the government is short of cash, the government happily passes on the increases to the public.

For example the current increase alone saw a price increase of 31% in kerosene, 5% in petrol and a diesel of over 7%. This is totally against the Mahinda Chinthana pro poor strategies, which clearly stated that providing subsidies to the poor is the responsibility of the state.

The main opposition the UNP for a change has come out strongly against the price hike.

The UNP has said the fuel increases on all petroleum products was unfair on the public while a large number of cabinet ministers and families were enjoying all the comfort at public expense.

The UNP also charged that the president had made this hike despite repeated assurances that he would not increase fuel prices in line with the fluctuating global market prices and also that he would get special concessions from West Asia.

According to the Chief Opposition Whip Joseph Michael Perera, the administration so far had increased fuel prices on no less than 15 occasions.

Perera while agreeing that the country could not control the rising global oil prices however observed that the country could strengthen the rupee against the dollar by improving our economic fundamentals.

This is very true, every time the cost of 1 US$ appreciates by Rs 1 the retail price of a litre needs to be increased around 40 to 60 cents. Perera observed that during the UNF rule from 2001-2004 the cost of one US$ dropped to Rs 93 from Rs 96. The JVP, which made noisy protests against the UNF government for every small increase is keeping mum other than urging the government to grant special concessions to the poor and saying that the government should not have raised the price of kerosene since it was used by the majority rural people who voted Rajapaksa into office.

The opposition is also urging the government to remove some of the taxes imposed on kerosene. Currently the government tax component on kerosene is Rs 1.50, diesel Rs 3.90 and petrol Rs 36.30.

The problem the president has is that the government institutions owe over Rs 22 billion to the CPC of which Rs 3.2 billion is overdue by one year. So the public either directly or indirectly has to pay for CPC’s funding costs. According to industry sources CPC only makes Rs 1.37 on a petrol litre, 0.60 cents on a diesel litre and 0.40 cents on a kerosene litre.

So perhaps the government instead of blaming the global fuel price hikes for the crisis in the CPC should look at opportunities to make the CPC more efficient, lean and productive. For example the current cost of an oil barrel is around 71 dollars, the CPC’s cost of importing that barrel is around 81 dollars. So the government without passing on the cost of inefficiency to the public should come up with a viable strategy to deal with some of the management issues plaguing the CPC.

Economic growth
The main reason Rajapaksa is being forced to pass on the fuel hikes to the common man is because he is spending some thing like Rs 130+ billion on the war this year and therefore he has no funds to cushion the increases.

To add to this the Lankan rupee keeps depreciating. So peace is a prerequisite to sustained economic growth and development. So unless the president and his 100 plus ministers can garner the support of the international community to get the peace talks going he may find it difficult to get the LTTE back to the table. Achieving durable peace is the most critical success factor for our country.

Its failure can take this country off course and will be the greatest impediment for investment and economic growth.

Then one of our key concerns is the budget deficit. Our past experience suggests that our actual deficit is much more than the target. So it is imperative that we meet the estimated revenue and expenditure is contained.

If not, we are very likely to have high inflation, which is anti poor because it increases the cost of living. That is the poor will be forced to consume the same amount, but it will costs twice as much. So unless the government is prudent in spending unavailable funds and printing money to pay for it we will not be able to contain COL.

So what Rajapaksa did by increasing the fuel prices was the correct thing. But the problem is that he made many promises to the nation to get elected. Also inflation management was not even in the Mahinda Chintanaya. So people expect him to walk the talk. But the situation is not going to be easy for him to deliver those promises. The Colombo bourse alone in the last few weeks has lost billions in value with the main indices down due to the worsening security situation.

Unless the killings and abductions stops and governance improves many investors will pull out or would not want to reinvest to grow their businesses. Today the CFA appears to have no meaning as the country continues to slide towards an open confrontation between the LTTE and security forces in the north.

Budget deficit
Many analysts worry about a jumbo budget deficit than those given in the estimates and that they fear will push inflation to record levels again. The budget deficit is expected to deteriorate and go beyond 9% of GDP compared to 8.4% in 2006. Analysts say poor fiscal discipline and populist measures could even push the deficit beyond 10%. Higher corporate taxes and continued rise in oil prices are also factors we have to contend with. Hence the economy needs better handling to meet these internal and external shocks. The primary reason for inflation to hit 21% this year was a result of poor monetary policy and printing money. The recent decline to 15% is due to tightening of monetary policy. But for how long? Because of poor fiscal discipline, inflationary pressures is expected resurface by the year-end of 2007, therefore inflation will to a large extent depend on the fiscal policy of the government.

The government so far has made an effort to tell some of our gullible people that it is the high oil prices that’s driving COL. But with opposition building up the government would be forced to improve its fiscal discipline to contain inflation.
Then on the interest front, interest rates on loans have hit 20%. Few sectors in the country can generate a ROI of over 20% to service a loan borrowed at 20%. Therefore employers are worried with the escalating costs because it is affecting their international competitiveness. Interestingly, the government today is surviving on Middle East remittances to pay for its imports and beef up its reserves.

Way out
The debt burdened economy and the affect of the ever-rising COL are now felt by the average citizen of this country. The majority of the people of Sri Lanka do not care who runs the economy, as long as it is effectively run. It is high time the people of this country without watching in silence while the politicians do what they desire on an ongoing basis hold political leaders accountable and responsible for their actions.

In this context civil society should exert pressure on both sides to at least work together to resolve the ethnic issue. The bureaucracy on the other hand too needs to wake up from their slumber. Then the government needs to wake up fast and meet the challenge thrown to them by the LTTE. Rajapaksa got a mandate from the south not only to stop the division of the country and talk peace, but also to deliver economic prosperity to the poor. He should at least now focus more and more on international capital inflows as a strategy for accelerating economic growth coupled with export-oriented industrialization.

The war and the security situation are once again setting back economic progress; therefore in the final analysis all political parties at least now should shed their political differences and unite behind a common vision to get the peace process to work. If not the country will be confronted with a prolonged crisis on the economic and political fronts that will only make Sri Lanka a sadder place for the majority of Sri Lankans who have nowhere else to go to make a living.