The rain had taken a breather on Thursday morning and yours truly was taking a break with Kussi Amma Sera’s piping hot cup of tea when rudely interrupted by the loud shrill of the land line. Karapincha Perera, the tea-kade gossip, was on the line and wanting to discuss the rising fuel prices. “It’s only [...]

Business Times

“I-don’t-know” craze


The rain had taken a breather on Thursday morning and yours truly was taking a break with Kussi Amma Sera’s piping hot cup of tea when rudely interrupted by the loud shrill of the land line.

Karapincha Perera, the tea-kade gossip, was on the line and wanting to discuss the rising fuel prices. “It’s only going one way – up and away,” he said, referring to the latest hike in local fuel prices.

International oil prices had risen to US$84.71 (Brent crude price) on Wednesday and with that Sri Lanka’s monthly fuel price revision saw local prices rise to Rs. 155 per litre for petrol (Octane 92) while auto diesel prices remained unchanged at Rs. 123. Government politicians keep stoutly defending the fuel price revision, saying the prices were still below pre-January 2015 prices. That is not exactly true but more on that later.

Karapincha Perera, who is also a habitual joker, was joking about the price revisions and its impact on the public.

“We have also embraced the #me too movement,” he laughed over the phone. “What do you mean?” I asked.

“Why, soon after the Finance Minister said he was not aware about how the fuel pricing formula was worked out (whether he was joking or not when he made this statement to the media, is not clear), the Prime Minister also said … ‘me too… me too’,” stating that he too was unaware and to ask the Finance Minister. This is a real merry-go-round. It’s very difficult to keep a secret within Colombo’s chattering social classes but this fuel pricing formula seems to be a well-kept secret or the politicians are simply lying that they are unaware,” he said in response.

It reminded me of singer Sunil Perera’s hilarious song, ‘I don’t know why – Meheme wenna ayi … lankawe ohoma thamai, I don’t know why’. It’s a parody on politicians and their claims.

Just like the #me too movement which took the US by storm with women claiming they were sexually abused by film directors and producers and cases emerging in India where similar claims are being made, our politicians too can lay claim to a new #me too movement of ignorance (is bliss!) — being unaware of happenings and their own directions under their belt! The political circus, if not for its seriousness, would make a fabulous movie with Sunil Perera as its star performer!

For the record, oil prices in 2014 were $104.53 per barrel and locally Rs. 150 per litre for petrol and Rs. 111 per litre of auto diesel.

According to the latest price revision, on October 10, petrol rose by Rs. 6 per litre to Rs. 155, while auto diesel remained unchanged at Rs. 123 per litre which are still higher than 2014 local fuel prices with the international crude oil price (Brent crude) pegged at $84.71 per barrel, still lower than end-2014 prices (just before Maithripala Sirisena won the Presidential poll). So, how can the Government say prices are lower than those during the former regime?

“Ohoma thamai … Ohoma thamai (that’s the way … that’s the way),” laughed Karapincha Perera, interrupting my thoughts during the conversation, and also adding, “How can the Government say prices are lower than what they were before (during the previous regime)?”

Fuel prices are hiking the cost of living with transport costs and essential goods rising, whatever Central Bank or Government pundits may say. Since May 2018, when the Government introduced a fuel pricing formula (initiated at the ‘request’ of the International Monetary Fund to reduce state subsidies), the fuel price has gone up five times, sometimes including auto diesel (which impacts on the poor) and sometimes not. Call it what you may, the fact remains that essential fuel prices now are higher than the pre-January 2015 election period.

Oil prices are rising in West Asia and the US has imposed trade strictures against Iran while the trade war between the US and China has rattled many countries including Sri Lanka through a ripple effect and these oil prices are unlikely to come down in the near term. On the other hand, the US dollar is galloping against the rupee and other South Asian currencies too with rising interest rates in the US seeing investors returning to the US after parking their funds in emerging markets which earlier offered better interest rates.

With $4 billion due to be paid by the Government as interest and capital repayments on foreign loans in 2019-2020, pressure on the country’s foreign reserves is at breaking point, though the administration puts up a brave “no-problem” face while at the same time asking the working class to tighten its belt.

One of the ways to address rising oil prices is through futures contracts and hedging but the Government burnt its fingers in 2008 when it entered into a series of futures contracts with a group of banks led by Standard Chartered.

According to the Committee on Public Enterprises (COPE), Sri Lanka suffered a loss of Rs. 10.2 billion owing to a poorly-constructed deal which favoured the banks and not the country.

Crude oil prices in the global market dropped drastically several months after the agreement was reached, which was when the problems arose. The Business Times was the first to highlight the inherent dangers in this deal which was structured by the banks and in which the Ceylon Petroleum Corporation (CPC) chose not, in its failed wisdom, to hire its own expertise to jointly structure the deal.

According to the deals, the CPC entered into the hedging of risk through “zero cost collars”. The collar had the ceiling of $130 per barrel (decided by the CPC) and a floor of $100 per barrel (decided by the counter parties, the banks). The CPC anticipated prices to rise but didn’t structure the deal to also handle falling prices. And this is where the problem arose when prices fell to a low of $60 per barrel from a high of $140. At this point the CPC had to pay the banks the difference between $60 and $100, thereby losing billions of rupees.

Many countries resort to futures trades and hedging in essential commodity purchases and if sound policies with proper expertise were followed at that time, Sri Lanka should have gained from the roller-coaster ride in oil prices.

While hedging and futures contracts seem to be the only way to tackle erratic swings in oil prices – given the politics of the world order mostly governed by the US — it remains to be seen whether Sri Lanka will re-examine these options as a hedge against fragile oil prices after having burnt its fingers once.

The opposition is screaming out loud that the economy will soon collapse, while the Central Bank Governor and the Finance Minister are stoutly defending the Government and dismissing these claims. In the meantime, the dollar was trading at around Rs. 170-172 levels this week, indicating a rupee depreciation of over 10 per cent against the dollar since January 2018. A depreciating rupee means an increase in import costs of essential food items.

The Central Bank says it won’t allow the dollar to reach unmanageable levels and would intervene in the market when necessary. The question is what is the unmanageable level of the dollar – Rs. 150, 160, 170 or 190? It’s anybody’s guess.

Finally here’s a secret: Want to know why the fuel pricing formula is Colombo’s well-guarded secret? It’s because the tax component in the formula is over 50 per cent. It you remove the tax component, the prices will sink by half of today’s rate.

But a country cannot survive without taxes and high taxing of fuel has been the easy way out for many Governments. The principle of such taxation is an expectation that higher taxes will reduce consumption just like taxes on cigarettes and alcohol. In the case of fuel it never does, apart from increasing Government revenue.

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